Understanding Fraud: Terms & Definitions
To better understand the nature of these chargebacks and what you will see more of moving forward, we want to discuss definitions for terms you might hear, chargeback codes you might see, types of fraud, and even some simple examples that show the true complexity of chargebacks.
Something that everyone who deals with chargebacks should understand is that the definition of ‘fraud’ when it relates to chargebacks is probably a bit more open-ended than you think it is. For many in the processing industry, the term fraud does not just apply to bad-actors or ‘fraudsters’ who steal credit card numbers and personal information to steal products, services or money, which we can call ‘Traditional Fraud’.
The term fraud is also more broadly applied to the actual cardholder when they initiate a chargeback for services they did purchase or receive. When the actual cardholder initiates the chargeback dispute this is referred to as ‘Friendly Fraud’. To confuse that issue further, you will see sub-categories of Friendly Fraud. For example, some of these disputes are ‘Benign’ which allows for chargebacks that are initiated by the cardholder in good faith, such as not recognizing the charge, misunderstanding policy, or having a legitimate dispute. When these ‘benign’ chargebacks are submitted by the cardholder, as you will see the most likely chargeback code will fall under the classification of fraud.
‘Hostile Friendly Fraud’ is when a cardholder initiates a chargeback dispute to receive monies that they are not due. Basically, they are taking advantage of a system that favors them over the merchant (especially when the card is not present). According to Global Risk Technologies (GRT) in their examination of Friendly Fraud, “approximately 86% of chargebacks are fraudulent, and many consumers bypass merchants to directly file complaints with card-issuing banks”.