Community banks are reporting fraud losses, becoming the largest source of portfolio losses, according to recent data from the Federal Reserve. Among these, first-party fraud—fraud committed by the consumer—is the most prevalent.
Also known as friendly fraud, fraudulent disputes, or chargeback abuse, first-party fraud poses unique challenges for banks. In the payments space, one of the most common forms of first-party fraud is consumers falsely reporting authorized transactions as card fraud. While these incidents may not represent the highest dollar losses, they account for the largest number of fraud cases. Motivations range from buyer remorse to budget constraints, but regardless of the reason, this behavior constitutes fraud and abuses consumer protection laws and network safeguards. To combat this growing threat, banks must take proactive steps to identify and mitigate it.
The Growing Challenge
In 2024, consumers disputed $11 billion worth of charges—a staggering 40% increase since 2019. Not all disputes are legitimate, and as abuse of the dispute system grows, payment networks are responding.
The networks have been streamlining dispute tracking in response to merchant complaints; one network has collapsed 38 separate categories into one. These changes empower merchants to more efficiently deny consumer disputes, which in turn forces banks into more difficult conversations with their customers.
What Banks Can Do
1. Uncover First-Party Fraud Data
Start by collecting and analyzing declined card chargebacks. Merchants can reject chargebacks if they have compelling evidence—such as matching IP addresses, tokenized transactions or other proof the purchase was authorized by the consumer. These declined chargebacks are one type of first-party fraud and are the starting place for banks to start measuring this type of fraud.
2. Review Consumer Procedures
Consumers may be misled by social media posts that encourage fraudulent behavior. Since 1978, Regulation E has protected consumers against unauthorized transactions over $50—a threshold that would be closer to $250 today. Banks should regularly review their Regulation E procedures and leverage technological advances in provisional credit handling and debit card re-issue management.
3. Reassess Authorization Settings
High-risk merchant categories have evolved, particularly with the rise of sports betting and crypto merchants. Banks should scrutinize credit vs. debit card authorization settings, especially for quasi-cash transactions. The industry has tokenized transactions for fraud protection. If a transaction should be tokenized and isn’t—don’t approve it.
ICBA Advocacy and Support
ICBA is actively working with federal agencies to address fraud and adjust loss thresholds. At a recent Financial Education and Literacy Commission meeting—chaired by Treasury Secretary Bessent and comprising leaders from 24 federal agencies—ICBA was the sole non-governmental presenter. ICBA highlighted the economic impact of community banks and the growing threat of payments fraud and scams.
Additionally, in response to a federal request for information, ICBA submitted a letter to the OCC, Federal Reserve, and FDIC, emphasizing the urgent need for agency action on fraud. ICBA continues to support community banks with tools to prevent, detect, and mitigate fraud.
ICBA encourages banks to join the ICBA Community fraud subgroup, which now includes nearly 1,000 members dedicated to sharing insights and strategies to combat fraud.
Learn more about the ICBA Payments Fraud Loss Protection Plangiving banks the option to recuperate a portion of their card fraud losses resulting from friendly fraud.