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.
