First-party fraud, friendly fraud & third-party fraud—What do these terms mean?

As payment fraud continues to grow and become more complex in the digital world, there are lots of terms to know. First-party fraud, friendly fraud, and third-party fraud are three terms that come up regularly when payments experts talk about card transaction disputes and chargebacks. 

But what do these terms mean, and what do businesses need to know to protect themselves against these types of fraud?

Understanding these types of fraud

Here are how these three payment fraud terms are defined and what you need to know:

Third-party fraud

This is true fraud—when an unauthorized person gets ahold of someone’s payment card information and credentials and makes purchases. 

Merchants have various ways to protect against losses from fraudsters, including using multifactor authentication and tools that alert them when cardholders dispute charges. Ethoca Alerts, for example, notifies merchants in near real time when someone disputes a charge—allowing them to spot third-party fraud quickly and take steps to prevent losses, such as canceling the order or stopping delivery.

According to LexisNexis Risk Solutions' 2024 True Cost of Fraud study, merchants in the U.S. and Canada lose an average of $3 for every $1 of fraud. 

First-party fraud and friendly fraud

These first-party fraud types mean the same thing and are often used interchangeably. It’s when a customer identifies a legitimate purchase on their transaction statement as fraudulent and disputes it, sparking the costly and time-consuming chargeback process. These types of disputes cost merchants upwards of $50 billion a year, according to Mercator Advisory Group.

First-party fraud—aka friendly fraud—can happen for multiple reasons. 

Here are three scenarios:

• Purchase confusion: A cardholder doesn’t recognize a transaction on their statement and assumes it’s fraudulent—even though it’s not. This sometimes happens when someone else in their household made the purchase without them knowing.
• Buyer’s remorse: A consumer is, for whatever reason, unhappy with their purchase and misuses the dispute and chargeback process to get their money back.
• Product- and service-related issues: A growing number of customers are bypassing merchants and disputing transactions with their card issuers to get a refund due to a problem they encountered with the transaction, such as a defective product or late delivery. 

How can merchants reduce first-party fraud?

First-party fraud has ballooned as a costly problem for merchants—especially given the e-commerce boom and increase in digital products and services, including subscriptions. A survey by FIS Global found that first-party fraud accounts for as much as 70% of all credit card fraud—a share that’s been growing—while Datos Insights found that it accounts for 75% of all fraud at digital businesses.

First-party fraud can be hard to detect because many merchants and issuers don’t have access to the information they need to distinguish first-party fraud from its more notorious counterpart, third-party fraud. It’s important to provide customers with the information and total experience that reduces the odds they’ll be tempted to dispute legitimate charges.

Merchants can reduce first-party fraud in various ways, including implementing customer-friendly practices such as generous product return and exchange policies and fixing service-related issues that might be causing disputes. For example, since purchase confusion is a common reason for first-party fraud, giving cardholders detailed transaction information through their banking apps—such as a clear merchant name and logo—can help prevent those types of disputes and chargebacks.

Participating in Mastercard’s First-Party Trust program—which is rolling out in the U.S. later this year, with other countries to follow—is another great option. This program will enable merchants to share information to help prevent first-party fraud. Developed in collaboration with merchant industry groups, the program creates greater transaction transparency, optimizes approval rates and simplifies the dispute process by activating merchants’ most powerful protection: data. It uses enhanced transaction insights provided by Ethoca to provide merchants with the tools to tackle first-party fraud from all directions. 

Being ready for first-party fraud’s growth

While first-party fraud has become a fast-growing problem, it’s important that merchants understand its impact on their bottom line and know how to stop it.

Learn more about how Mastercard and Ethoca are working to reduce first-party fraud.