The $16 Billion Loophole: How ‘Friendly Fraud’ Became Retailers’ Worst Nightmare
It starts with a charge on a credit card statement—a merchant you don’t recognize, a subscription fee you don’t remember authorizing, a product that arrived looking nothing like the picture. For millions of consumers, these moments of frustration have become a daily annoyance in the age of AI-generated product images, algorithmic shopping feeds, and fine-print fees.
But for a growing number of those consumers, annoyance is no longer the endpoint. It’s the justification for a chargeback—a consumer protection tool originally designed to shield cardholders from fraud, now being weaponized against retailers in what the industry calls “friendly fraud.”
And it’s costing everyone.
The Silent Epidemic
Friendly fraud—also known as first-party fraud—occurs when a cardholder disputes a legitimate transaction they knowingly made, falsely claiming the purchase was unauthorized, the item never arrived, or the product was “not as described”. Unlike traditional fraud, where stolen credentials are involved, friendly fraud is perpetrated by the cardholder themselves.
The numbers are staggering. According to the 2026 Chargeback Field Report from Chargebacks911, more than 83% of enterprise merchants report an increase in friendly fraud over the past three years. Nearly three-quarters of merchants—74.4%—now describe it as a moderate or significant concern.
Globally, the value of transactions lost to friendly fraud reached $8.1 billion in 2026 and is projected to nearly double to $16 billion by 2031, according to Juniper Research. That represents a 96% increase in just five years. The research firm attributes this surge to a troubling shift in consumer psychology: more people now perceive fraud targeting merchants as a “victimless crime”.
The LexisNexis Cybercrime Report found that first-party fraud increased from 15% of all reported fraud in 2023 to 36% in 2024, making it the number one reported fraud category worldwide.
A Consumer Reckoning—or a Rationalization?
So what’s driving the explosion? Industry analysts point to a perfect storm of economic pressure, consumer frustration, and moral drift.
“Buyer’s remorse drives 65.3% of friendly fraud cases,” according to 2026 chargeback statistics. As household budgets tighten and the cost of living remains elevated, some consumers see chargebacks as an easy way to recover money they’ve spent—whether or not they have a legitimate claim.
The ease of the process itself is a contributing factor. With mobile banking apps that allow disputes in just a few taps, the friction that once deterred frivolous claims has largely evaporated. Consumers can initiate a chargeback within a three-month window after a purchase, often without ever speaking to a human being.
Then there’s the growing sense, among some shoppers, that retailers have it coming. The Bloomberg article notes that consumers are increasingly frustrated by “sneaky subscription charges for services you have no memory of signing up for,” “line items on your credit card statement from merchants you don’t recognize,” and “return policies that have quietly become tighter and more punitive”. Products that arrive “smaller, shoddier or otherwise worse than what you thought you were buying” have become routine.
For some, filing a chargeback feels less like fraud and more like a form of consumer justice—a way to get back at merchants they perceive as having scammed them first.
The True Cost to Merchants
For retailers, the math is brutal. A chargeback doesn’t just mean losing the revenue from a sale. Merchants are hit with chargeback fees—typically $20 to $100 per dispute—and lose the cost of the merchandise itself. They also bear the expense of fraud-prevention tools, the labor required to investigate disputes, and the administrative burden of responding to each claim.
“Chargebacks rarely cost merchants only the value of the original transaction,” said Monica Eaton, founder and CEO of Chargebacks911. “Once all factors are considered, the financial impact can multiply quickly”.
The costs are being passed on to consumers. Thirty-eight percent of merchants say the costs associated with chargebacks have influenced the prices of their goods or services, up from 32.5% in the previous year. In other words, honest shoppers are subsidizing the abuse of the system.
Refund abuse compounds the problem. Merchants estimate that abusive requests account for 27.1% of all returns, and 62% describe refund abuse as a moderate or significant concern.
A London Kebab Shop’s Unconventional Revenge
The human toll of friendly fraud is perhaps best illustrated by the story of Rusty Nart, a restaurant owner in south London. Nart owns a cafe in Tooting and a kebab shop in New Addington. He told the BBC that he noticed a surge in friendly fraud scams at both businesses.
“People will come in and spend a certain amount of money, and then within a three month period, they’ve got a window where they can chargeback a payment,” Nart explained.
Frustrated by the lack of support from his bank and card machine providers, Nart took matters into his own hands. He began keeping every paper receipt, matching each chargeback to a specific transaction, and then driving to customers’ homes to confront them.
“I don’t advise other business owners to do this as it could be a little dangerous, but this was the route I took since the card machine providers and banks don’t seem to be doing anything,” he said.
Though he recovered the funds each time, Nart’s story underscores a painful reality: for many small businesses, the system offers little protection against a problem that is rapidly spiraling out of control.
The Technology Arms Race
In response to the surge, merchants are turning to artificial intelligence. According to the 2026 Chargeback Field Report, 26.7% of merchants currently use AI-based fraud prevention tools, while another 37% plan to adopt them. Combined, nearly two-thirds of respondents are either using or preparing to use AI to combat friendly fraud.
These systems use adaptive machine learning to spot anomalies in real time, identifying patterns that might indicate a chargeback is imminent. But the technology is far from foolproof, and many merchants lack the resources to deploy it effectively.
Only about 34% of merchants say they have a dedicated chargeback team or department head, and fewer than 30% use any form of third-party assistance. For most small businesses, chargeback management falls to employees in finance, operations, or customer service—people who may not have specialized training in fraud prevention.
Meanwhile, new payment methods are introducing additional risks. Approximately 19.1% of merchants accept buy now, pay later (BNPL) payments, but nearly four in 10 respondents believe BNPL can increase chargeback exposure.
A System Under Strain
The chargeback system was created to protect consumers from genuine fraud—a vital safeguard in an increasingly digital economy. But as friendly fraud proliferates, that system is buckling under the weight of its own success.
Some consumers are exploiting the system deliberately, viewing it as a loophole rather than a protection. A 2025 YouGov survey for Checkout.com found that 13% of consumers believe they “could get away with initiating a chargeback or refund on an online payment to receive goods or services free of charge”.
Among Gen Z shoppers, the numbers are even more striking: 42% have admitted to committing first-party fraud.
The problem is particularly acute in e-commerce, where the distance between buyer and seller makes consumers more comfortable raising fraudulent claims. Card-not-present transactions—those made online or over the phone—are far more likely to be disputed than in-person purchases.
The Road Ahead
As friendly fraud continues to climb, the industry is scrambling for solutions. Visa’s Acquirer Monitoring Program (VAMP) has introduced new monitoring requirements for merchants, though one in five businesses say the changes have directly affected them, and nearly a third don’t even know whether they’ve been impacted.
Juniper Research recommends the use of pre-chargeback alerts and pre-emptive refunds to avoid costly fees. But these measures come with their own costs and risks.
For now, the burden falls disproportionately on merchants—particularly small businesses that lack the resources to fight back. And as the costs are passed on to consumers in the form of higher prices and stricter policies, everyone pays the price for a system that was never designed to withstand the kind of abuse it now faces.
“Friendly fraud has moved from being a back-office inconvenience to a material business risk,” Eaton said. “It is influencing pricing, customer policies, staffing decisions and the economics of digital commerce. The problem is growing faster than many merchants’ ability to identify, measure and manage it”.
