How to protect against Gen Z committing so-called friendly fraud

Most business leaders are all too familiar with the challenges of protecting their organizations from hackers and spammers. But what do you do when legitimate customers are the ones participating in fraudulent activities? 

“Friendly fraud,” also known as first-party fraud, occurs when customers file a fraud claim or charge-back despite being satisfied with a purchase. Sometimes it can be done unintentionally—when, for example, a family member makes a purchase with someone’s credit card without their knowledge. Other times, friendly fraud is committed intentionally to get an item free, or because of a negative experience with a business. 

While these individual actions may seem small, they add up to a $100 billion problem for businesses. It’s especially challenging for brands that sell clothing and accessories; subscriptions for digital goods; groceries; electronics; and food deliveries, according to data from my company Sift. However, the reality is that no business is immune to online fraud (unless they’re a cash-only rarity). Every major business, from Walmart to Netflix, Uber to Expedia, are targets simply because they accept digital payments. 

But not everyone is committing fraud in equal measure. Recent research from Sift revealed that 42% of Gen Z admit to engaging in first-party fraud, significantly more than any other generation. While the reasons for this aren’t fully understood, we can identify a few likely factors that will help businesses respond to the costly trend. 

Why does Gen Z seem more willing to commit friendly fraud?

First, younger consumers may not realize that what they are doing is fraud. They may think their actions are a “hack” or that they are just “gaming the system,” and that the only people their actions hurt are credit card companies. Business owners who bear the costs of charge-backs know this isn’t true, but many consumers are unaware that it is the merchant who absorbs the cost of the charge-back.

When a customer disputes the purchase of a good or service, a business loses out on the funds from said purchase. Adding to the sting, they’re also charged a fee by their payment provider. But many people (unless they run a business) are unaware of this, and may see charge-backs as a harmless way to recoup lost funds, especially if they had a negative experience with a business. 

Another contributing factor is the broader economic environment and its impact on younger generations, whose anxiety levels are at an all-time high as they face fluctuating inflation and waves of layoffs. With budgets tighter as housing, food, and other necessities become more expensive, many young adults are naturally looking for ways to stretch their dollar. 

It’s possible that these challenging economic times can act as a justification for filing a charge-back. The thinking goes that a company may not feel too much pain from losing a $40 purchase, but that money can go a long way in buying food for a single person. Friendly fraud is one of the most common online fraud tactics because it has a lower barrier to entry—anyone can make a legitimate purchase and then dispute it, and they may not even think what they’re doing is committing fraud. 

The last reason is that we could be undergoing a cultural shift where this kind of fraud isn’t looked at as ethically wrong. Some may see filing a charge-back as a victimless crime that harms only large companies. The reality, of course, is that at the scale in which such fraud is being committed, it can have a real effect on any business’s bottom line. That can have a domino effect that hurts consumers, too: If companies end up losing too much revenue, they may have to resort to increasing prices to offset losses. 

What can companies do about friendly fraud? 

Friendly fraud is a complex challenge with no silver bullet to solve it. Nevertheless, there are critical steps businesses should take to protect themselves: 

• Prioritize clear customer communications and remember that there are several reasons a customer may file a charge-back: because they don’t recognize a transaction on their credit card, they bought the wrong item, they’re dissatisfied with a product or service, or they simply forgot that they made the purchase in the first place. 
• Have clear cancellation and return policies in place to prevent confusion. This will also support documentation if a business has to dispute what it believes to be a fraudulent charge-back.
• Offer alternatives so that shoppers don’t file charge-backs to begin with. Respond to customer service disputes promptly, and offer refunds or alternatives quickly so that shoppers do not feel the need to dispute a charge with a payment provider to get your business’s attention. 
• Make sure to collect all the right information. Maintaining detailed records of customer transactions—including IP addresses, device information, and delivery confirmation—can provide evidence to card networks to refute unfounded charge-back claims. By making sure they’re collecting customer and purchase information, including screenshots, companies can use evidence that the customer actually did purchase what they received. In fact, this type of evidence is now required by Visa as part of its dispute-resolution process. 

Businesses face a significant threat from first-party fraud, particularly with evidence that younger generations are more willing to participate in it. By understanding the cause and effects of friendly fraud, merchants can protect their financial interests, maintain customer trust, and counter the impact of this trend on their bottom line—and the broader economy.

Most business leaders are all too familiar with the challenges of protecting their organizations from hackers and spammers. But what do you do when legitimate customers are the ones participating in fraudulent activities? 

“Friendly fraud,” also known as first-party fraud, occurs when customers file a fraud claim or charge-back despite being satisfied with a purchase. Sometimes it can be done unintentionally—when, for example, a family member makes a purchase with someone’s credit card without their knowledge. Other times, friendly fraud is committed intentionally to get an item free, or because of a negative experience with a business. 

While these individual actions may seem small, they add up to a $100 billion problem for businesses. It’s especially challenging for brands that sell clothing and accessories; subscriptions for digital goods; groceries; electronics; and food deliveries, according to data from my company Sift. However, the reality is that no business is immune to online fraud (unless they’re a cash-only rarity). Every major business, from Walmart to Netflix, Uber to Expedia, are targets simply because they accept digital payments. 

But not everyone is committing fraud in equal measure. Recent research from Sift revealed that 42% of Gen Z admit to engaging in first-party fraud, significantly more than any other generation. While the reasons for this aren’t fully understood, we can identify a few likely factors that will help businesses respond to the costly trend. 

Why does Gen Z seem more willing to commit friendly fraud?

First, younger consumers may not realize that what they are doing is fraud. They may think their actions are a “hack” or that they are just “gaming the system,” and that the only people their actions hurt are credit card companies. Business owners who bear the costs of charge-backs know this isn’t true, but many consumers are unaware that it is the merchant who absorbs the cost of the charge-back.

When a customer disputes the purchase of a good or service, a business loses out on the funds from said purchase. Adding to the sting, they’re also charged a fee by their payment provider. But many people (unless they run a business) are unaware of this, and may see charge-backs as a harmless way to recoup lost funds, especially if they had a negative experience with a business. 

Another contributing factor is the broader economic environment and its impact on younger generations, whose anxiety levels are at an all-time high as they face fluctuating inflation and waves of layoffs. With budgets tighter as housing, food, and other necessities become more expensive, many young adults are naturally looking for ways to stretch their dollar. 

It’s possible that these challenging economic times can act as a justification for filing a charge-back. The thinking goes that a company may not feel too much pain from losing a $40 purchase, but that money can go a long way in buying food for a single person. Friendly fraud is one of the most common online fraud tactics because it has a lower barrier to entry—anyone can make a legitimate purchase and then dispute it, and they may not even think what they’re doing is committing fraud. 

The last reason is that we could be undergoing a cultural shift where this kind of fraud isn’t looked at as ethically wrong. Some may see filing a charge-back as a victimless crime that harms only large companies. The reality, of course, is that at the scale in which such fraud is being committed, it can have a real effect on any business’s bottom line. That can have a domino effect that hurts consumers, too: If companies end up losing too much revenue, they may have to resort to increasing prices to offset losses. 

What can companies do about friendly fraud? 

Friendly fraud is a complex challenge with no silver bullet to solve it. Nevertheless, there are critical steps businesses should take to protect themselves: 

• Prioritize clear customer communications and remember that there are several reasons a customer may file a charge-back: because they don’t recognize a transaction on their credit card, they bought the wrong item, they’re dissatisfied with a product or service, or they simply forgot that they made the purchase in the first place. 
• Have clear cancellation and return policies in place to prevent confusion. This will also support documentation if a business has to dispute what it believes to be a fraudulent charge-back.
• Offer alternatives so that shoppers don’t file charge-backs to begin with. Respond to customer service disputes promptly, and offer refunds or alternatives quickly so that shoppers do not feel the need to dispute a charge with a payment provider to get your business’s attention. 
• Make sure to collect all the right information. Maintaining detailed records of customer transactions—including IP addresses, device information, and delivery confirmation—can provide evidence to card networks to refute unfounded charge-back claims. By making sure they’re collecting customer and purchase information, including screenshots, companies can use evidence that the customer actually did purchase what they received. In fact, this type of evidence is now required by Visa as part of its dispute-resolution process. 

Businesses face a significant threat from first-party fraud, particularly with evidence that younger generations are more willing to participate in it. By understanding the cause and effects of friendly fraud, merchants can protect their financial interests, maintain customer trust, and counter the impact of this trend on their bottom line—and the broader economy.