Chargebacks and Friendly Fraud: Using Demand Letters to Push Back Against Abusive Customers
The chargeback system was designed in the 1970s to protect consumers from unauthorized credit card charges and merchant fraud. Fifty years later, that same system has become a tool for a different kind of fraud: customers who received exactly what they paid for, used it extensively, and then weaponized the dispute process to get their money back while keeping the product or service. This is friendly fraud, and it costs merchants an estimated $15 billion annually in direct losses, not counting the additional fees, penalties, and processor sanctions that come with high dispute rates.
This article explains how demand letters function as a direct legal tool for merchants to pursue customers who have filed illegitimate chargebacks. The focus is on civil claims against the cardholder for breach of contract, unjust enrichment, and fraud, not on fighting the chargeback through the card network’s dispute process, which is covered elsewhere. For merchants selling digital products, software, services, and high-ticket items online, a well-drafted demand letter may be the only practical way to recover losses from repeat offenders and signal that friendly fraud will not be tolerated.
Understanding Chargebacks and Why the System Favors Cardholders
A chargeback is a forced reversal of a credit or debit card transaction initiated by the cardholder through their issuing bank. When a customer disputes a charge, the issuing bank investigates the claim under the requirements of federal consumer protection law, pulls the funds from the merchant’s acquiring bank, and credits the cardholder’s account. The merchant then has a limited time to respond with evidence that the transaction was legitimate, a process called representment. If the merchant’s evidence is not compelling, or if the merchant misses the deadline, the chargeback becomes permanent.
The legal framework governing chargebacks is built entirely around consumer protection. The Truth in Lending Act and its implementing Regulation Z, codified at 12 CFR Part 1026, establish billing error resolution procedures that give cardholders the right to dispute unauthorized charges, charges for goods not delivered as agreed, and charges for goods or services not accepted by the cardholder. The Electronic Fund Transfer Act and Regulation E, codified at 12 CFR Part 1005, provide similar protections for debit card and electronic fund transfer errors. These regulations explicitly require issuing banks to credit the cardholder’s account during the investigation period and limit the bank’s ability to collect the disputed amount from the cardholder while the investigation is pending.
From the merchant’s perspective, this creates a structural imbalance. The issuing bank’s duty runs to its customer, the cardholder, not to the merchant. The card networks, Visa and Mastercard primarily, operate as payment facilitators and dispute arbitrators but are not parties to the underlying transaction between merchant and customer. The merchant’s contractual relationship is with the acquiring bank or payment processor, which typically includes clauses that shift chargeback liability and costs entirely to the merchant.
Recent data published by Visa and compiled by research groups sponsored by Mastercard indicate that approximately 45% of all chargebacks are first-party fraud, meaning the cardholder initiated the dispute despite having authorized the purchase and received the goods or services. Common patterns include claiming a legitimate transaction was “fraud” or “unauthorized,” disputing digital downloads as “not received,” filing “goods not as described” claims after fully using a service, and exploiting the family member loophole by allowing a spouse or child to make purchases and then disputing them as unauthorized.
The networks and processors have made recent efforts to address friendly fraud. Visa’s Compelling Evidence 3.0 framework, introduced in 2023, allows merchants to use evidence of prior undisputed transactions with the same cardholder on the same card to rebut certain fraud-coded disputes. Mastercard’s chargeback guides emphasize merchant documentation and encourage acquirers to support legitimate businesses against abusive disputes. These improvements help at the network level, but they do not change the fundamental reality that once the issuing bank credits the cardholder, the merchant’s primary recourse is to pursue the cardholder directly under ordinary contract and tort law.
Where Demand Letters Fit in the Dispute Ecosystem
A chargeback dispute operates on two parallel tracks. The first track runs through the payments system: the cardholder complains to the bank, the bank applies federal regulations and card network rules, classifies the dispute under a reason code, and reverses the charge. The merchant can submit compelling evidence through the processor to challenge the chargeback. If the issuing bank accepts the merchant’s evidence, the transaction may be re-presented and the funds returned to the merchant. If the bank rejects the evidence or the merchant misses the deadline, the chargeback stands.
The second track is the civil legal relationship between the merchant and the customer. Even if the issuing bank decides to credit the cardholder under its regulatory obligations, the customer’s contractual obligation to pay for goods and services received does not disappear. If the customer ordered products, received them, used them, and then engineered a chargeback under false pretenses, the merchant has claims for breach of contract, unjust enrichment, and potentially fraud. Those claims are not resolved by the bank’s procedures. They are resolved between the parties, either through direct negotiation, settlement, or litigation.
A demand letter operates on this second track. It does not challenge the bank’s decision or ask the issuing bank to reverse its position. Instead, it communicates directly with the customer, explains why the chargeback was improper based on the facts and the contract, lays out the legal theories supporting the merchant’s claims, and provides a clear deadline and method for the customer to make the situation right voluntarily before the merchant pursues formal legal action.
For merchants dealing with digital products, subscription services, online courses, coaching and consulting, and other services where fulfillment can be easily documented, demand letters are often more effective than fighting through the card network’s process. The network’s dispute procedures are limited by tight deadlines and rigid evidence requirements. A civil demand letter allows the merchant to present a broader factual narrative, invoke multiple legal theories, and create consequences beyond just the chargeback amount, such as small claims litigation, credit reporting, and reputational damage.
Distinguishing Friendly Fraud from Legitimate Disputes
Before sending a demand letter that accuses a customer of fraud, merchants must honestly evaluate whether the chargeback was truly wrongful. Not every customer dispute is friendly fraud. Legitimate chargebacks arise from genuine unauthorized use, meaningful service failures, non-delivery of goods, and material deviations from what was promised. Courts and regulators have little sympathy for merchants who try to characterize their own failures as customer fraud.
Friendly fraud typically appears in recognizable patterns. A customer completes an online purchase, receives tracking confirmation showing delivery to their address, and weeks later files a “goods not received” dispute. A subscriber uses a software platform heavily for months, generates significant usage data demonstrating active engagement, and then files a “fraud” or “unauthorized” dispute. A buyer downloads digital products immediately after purchase, consumes them fully, and then claims the charge was not authorized. A customer’s family member makes repeated purchases with the account holder’s knowledge over an extended period, and then the account holder files multiple “unauthorized” disputes only after noticing the total charges on the monthly statement.
These patterns share common elements: the customer clearly received and used what they purchased, there is objective evidence of receipt and usage, the customer did not attempt to resolve the issue through the merchant’s refund or support channels, and the timing of the dispute suggests buyer’s remorse or a conscious decision to reclaim the money after obtaining the benefit.
In contrast, legitimate disputes often involve documented service failures, clear non-delivery, material misrepresentations in the merchant’s marketing or sales process, or genuine unauthorized use by a third party. If the merchant failed to ship goods as promised, if the service was materially defective and the merchant ignored complaints, if the sales page made specific promises that were not delivered, or if there is evidence suggesting the charge was truly unauthorized, the customer may have had valid grounds to escalate to the bank even if the merchant’s policies prefer internal resolution first.
A practical screening test is to ask whether a neutral judge, looking at the documentation without any context, would see a straightforward pattern of the customer receiving and using exactly what they ordered and then deliberately seeking to avoid payment. If the answer is yes, the case is appropriate for a more aggressive friendly-fraud demand letter. If the answer is unclear or the merchant’s performance was genuinely problematic, the tone should be adjusted toward a commercial settlement discussion rather than a fraud accusation.
Building the Evidence File First
The most effective friendly-fraud demand letters are built on documentary evidence, not emotional accusations. Card processors and networks have published detailed guidance on what constitutes compelling evidence in disputes, and the same categories of data that strengthen a network representment also support a civil demand letter.
Merchants should assemble a complete file before drafting anything. The contract and terms of service should be preserved exactly as they appeared at the time of purchase, showing the refund policy, chargeback provisions if any, and any language about customer obligations. These terms should be shown alongside proof of acceptance, such as screenshots of the checkout flow demonstrating that the customer had to affirmatively click to agree to terms, or email confirmations sent immediately after purchase that reiterate the key terms.
Invoice and payment records establish the transaction details: order ID, date, amount, description of what was purchased, and payment method. For physical goods, shipping and delivery records are critical. Merchants should have carrier tracking showing delivery to the address provided by the customer, delivery confirmation signatures if available, and photographs or descriptions of the packaging as it was shipped. For digital products and services, merchants should collect login and usage logs showing when the customer accessed the account, what features they used, how much content they consumed or downloaded, and any customer-generated data such as saved preferences, uploaded files, or completed courses.
Communications history provides the narrative. Email exchanges, support tickets, chat transcripts, and any direct messages from the customer create a timeline showing whether the customer raised concerns before the dispute, acknowledged receipt and use of the product, or made statements inconsistent with their later chargeback claim. A customer who emails to say “I love this product” or “Can you help me with this feature” and then files a “fraud” dispute a week later has significantly undermined their own position.
Prior transaction history with the same customer is particularly valuable under Visa’s Compelling Evidence 3.0 rules. If the same customer has made multiple prior purchases on the same card that were not disputed, that pattern suggests the current “fraud” dispute is actually first-party misuse rather than genuine unauthorized activity. The Visa framework formally recognizes this type of evidence for fraud-coded disputes, but it is persuasive in any friendly fraud case because it demonstrates that the customer knows how to use the card, has established a pattern of legitimate transactions with the merchant, and is making a targeted decision to dispute this particular charge.
Device and IP address data can support the merchant’s position when the login or purchase came from the customer’s usual location and device. Processor tools like Stripe Radar collect and analyze these data points to assess fraud risk. If the merchant can show that the disputed transaction came from the same IP address range and device fingerprint as previous undisputed transactions, that significantly undermines a claim that the charge was unauthorized.
From a workflow perspective, merchants who face recurring chargebacks should create a standardized evidence collection process. Every dispute should trigger the creation of a “chargeback file” that compiles all of this material in a consistent format, whether or not a lawyer will ultimately send a demand letter. That discipline ensures nothing is missed and makes it far easier to respond quickly when deadlines are tight.
Coordinating the Demand Letter with Network Dispute Procedures
The demand letter strategy should complement, not replace, the merchant’s response through the card network’s dispute process. Card network rules and federal regulations create tight timelines for merchant representment. Once a chargeback is initiated, merchants typically have between seven and twenty-one days to submit evidence through their processor, depending on the card brand and dispute reason code. Missing that deadline means the chargeback automatically becomes permanent and the merchant loses the opportunity to recover the funds through the payments system.
The representment should be filed promptly and thoroughly, regardless of whether the merchant plans to send a demand letter. The two processes serve different purposes and operate under different rules. The representment seeks to reverse the chargeback through the card network by persuading the issuing bank or a network arbitrator that the transaction was valid. The demand letter seeks to collect directly from the customer by asserting civil legal claims.
In practice, it often makes sense to time the demand letter to follow the evidence submission for representment. By that point, the merchant has already assembled the key documentation, has seen the cardholder’s stated reason for the dispute, and has prepared a summary of the facts for the bank. That summary can usually be adapted into the factual section of the demand letter with relatively minor changes.
Some merchants prefer to wait until the bank has formally closed its investigation and issued a final decision before sending a demand letter, so the letter can accurately describe the outcome. This approach has the advantage of being able to say “the bank already investigated your claim and found it was not valid” if the representment was successful, or “the bank credited your account under its regulatory obligations, but you still owe us under the contract” if the representment failed.
The timing consideration is also legal. Regulation Z’s billing error provisions restrict issuing banks from attempting to collect disputed amounts from consumers while the error investigation is pending. Merchants are not issuing banks and are not subject to those restrictions, but they should frame the demand letter carefully to avoid creating the impression that they are trying to circumvent the consumer protection framework. The letter should make clear that it addresses the contractual relationship between merchant and customer, not the bank’s handling of the billing error claim.
A well-drafted letter typically acknowledges that the bank may have credited the customer’s account in accordance with its regulatory obligations, and then explains that the bank’s internal procedures do not eliminate the customer’s contractual duty to pay for goods and services actually received.
Legal Theories: Contract, Restitution, and Fraud
A friendly-fraud demand letter should reference legal principles without drowning the reader in case citations. The goal is to show that the merchant understands the law and has legitimate claims, while keeping the letter accessible and focused on practical resolution.
The simplest and strongest theory is breach of contract. When a customer places an online order, accepts the merchant’s terms of service, provides payment information, and receives the goods or services, a binding contract has been formed. The merchant’s performance consisted of delivering the product or providing the service as agreed. The customer’s obligation was to pay the agreed price. By initiating a chargeback under false pretenses and obtaining a refund for goods they received and used, the customer has effectively refused to perform their side of the contract. The claim is not that the chargeback mechanism itself violates any law; rather, the customer’s misuse of that mechanism constitutes a breach of their contractual payment obligation.
This theory works best when the merchant has clear terms of service that were presented at checkout, evidence that the customer affirmatively accepted those terms, and documentation showing that the merchant performed exactly what was promised. Merchants should avoid over-reaching on this theory by claiming breach when their own performance was materially defective.
A related theory is unjust enrichment or restitution. Even if some aspect of the contract formation is ambiguous or the terms of service were not perfectly presented, the underlying reality is that the customer received something of value, retained that value, and shifted the cost back to the merchant by engineering a chargeback. Unjust enrichment allows the merchant to seek repayment of the value conferred to prevent the customer from being enriched at the merchant’s expense in a way that is unjust under the circumstances. This theory is particularly useful when the formal contract terms are disputed but the customer’s use and retention of the product or service is undeniable.
In more egregious cases involving deliberate false statements, the merchant may have grounds to allege fraud or intentional misrepresentation. Common law fraud requires proof that the defendant made a false representation of material fact, knew it was false or made it recklessly without knowledge of its truth, intended the plaintiff to rely on it, and that the plaintiff justifiably relied on it and suffered damages. In the chargeback context, this might apply when the customer affirmatively told their bank that goods were never delivered despite having a tracking record showing delivery and signature confirmation, or told the bank that charges were unauthorized despite extensive communications with the merchant demonstrating that they knew about and used the service.
Fraud claims are powerful but risky. They raise the stakes significantly, imply potential criminal conduct, and will be scrutinized closely by judges if the case ends up in court. Merchants should only invoke fraud when the evidence truly supports it: situations where the customer made specific false statements of fact, there is clear proof those statements were false, and the customer’s intent to obtain money through deception is obvious from the circumstances.
The demand letter typically sets out one or two of these theories in straightforward language, avoiding legal jargon where possible, and reserves the right to assert additional claims if the matter proceeds to litigation. The tone should be firm but measured, showing that the merchant is serious without making inflammatory accusations that could undermine credibility.
Ethical Boundaries and Avoiding Extortion
Merchants are understandably angry when customers abuse the chargeback system. The temptation to threaten aggressive consequences is natural. But there are legal and ethical lines that must not be crossed, particularly when counsel is involved, and crossing those lines can transform a legitimate collection effort into an illegal threat.
California Penal Code sections 518 and 524 define extortion as obtaining property from another person with their consent, where the consent is induced by wrongful use of force or fear. The statute specifies several types of threats that constitute wrongful fear, including threats to injure person or property, threats to accuse someone of a crime, threats to expose secrets that would subject the person to disgrace, and threats to expose or make public any fact that would subject the person to hatred or ridicule. When a threat of this nature is made for the purpose of compelling payment of money, and the money is in fact a debt legitimately owed, the line between lawful collection and unlawful extortion becomes critical.
The law generally permits creditors to threaten to sue for a debt that is actually owed, and to accurately describe the legal consequences of nonpayment. What it prohibits is conditioning the decision to file criminal charges, make regulatory complaints, or cause other forms of non-legal harm on whether the debtor pays up. A demand letter can state “If you do not pay the amount owed by the deadline, I will file a civil lawsuit in small claims court to collect the debt.” That is a legitimate description of the merchant’s legal rights. A letter should not state “If you do not pay by Friday, I will report you to the police for fraud and to your employer for theft.” The latter links a threat of criminal or reputational harm directly to payment in a way that crosses into extortion territory.
California’s Rules of Professional Conduct add an additional layer of constraint for attorneys. Rule 3.10 prohibits lawyers from threatening to present criminal, administrative, or disciplinary charges solely to obtain an advantage in a civil dispute. The rule recognizes that lawyers sometimes represent clients who have both civil claims and potential criminal or regulatory complaints arising from the same facts, and it does not absolutely prohibit mentioning both. But it requires that any threat of criminal or regulatory action must be based on a good faith belief that the action is warranted and must not be used purely as leverage to extract a civil settlement.
Translated into drafting principles, these rules mean that a merchant or merchant’s counsel can describe the potential consequences of friendly fraud in general terms, such as explaining that deliberately filing false chargebacks may violate fraud statutes and could theoretically be prosecuted, but should not say “Pay me by next Friday or I will personally ensure you are prosecuted for fraud.” The letter can state that the merchant reserves all rights and remedies including reporting patterns of fraud to appropriate authorities, but should not make that reporting contingent on whether the customer pays.
Even when the letter is sent by the merchant directly without attorney involvement, overly aggressive threats can create problems. They may give the customer grounds to file their own complaint alleging harassment or extortion. They may undermine the merchant’s credibility with courts or regulators who later review the correspondence. And they can provide evidence that damages the merchant’s position if the customer countersues or mounts a public relations campaign claiming they were threatened.
A good test is whether the merchant would be comfortable having the letter read aloud in court or posted publicly. If the language is inflammatory, personally insulting, or clearly intended to humiliate or coerce rather than to state facts and legal rights, it should be revised.
Structuring the Friendly Fraud Demand Letter
Although every case depends on its specific facts, most friendly fraud demand letters follow a similar structure that works well for this type of dispute.
The opening identifies the sender, states that the sender represents the merchant or is the merchant, identifies the customer by name and address, and references the disputed transaction or transactions. It briefly explains that the purpose of the letter is to address a recent chargeback or series of chargebacks that the merchant believes were filed improperly, and to request repayment before the merchant takes additional action.
The factual background section walks through the transaction chronologically in neutral, factual terms. This section explains when and how the customer placed the order, what product or service was purchased, the price agreed upon, and any relevant terms and conditions. It then describes how the merchant performed its obligations, providing specific evidence such as shipping tracking numbers showing delivery, login records demonstrating account usage, or communications showing the customer’s engagement with the product. Next, it addresses the chargeback itself: when the merchant was notified, what reason code was given by the card network, what the customer allegedly told their bank, and the financial impact on the merchant including the reversed charge, chargeback fees, and any processor penalties.
After establishing the facts, the letter explains why the merchant views the chargeback as improper. This section highlights contradictions between the customer’s claim and the documented evidence. For example, if the customer claimed goods were not received but tracking shows delivery with signature confirmation, that discrepancy should be pointed out directly. If the customer claimed the charge was unauthorized but login logs show they accessed the account repeatedly from their usual device and IP address, that evidence undermines the “unauthorized” claim. If the customer had previously made similar purchases without dispute, that pattern suggests the current dispute is opportunistic.
The legal analysis section then summarizes the merchant’s claims. This portion should be concise, typically one or two paragraphs, and should name the legal theories in plain language while avoiding unnecessary legal jargon. It might say something like: “By accepting delivery of the product and then falsely claiming it was not received in order to obtain a refund, you breached the purchase contract and have been unjustly enriched at our expense. Your conduct may also constitute fraud under applicable law.” The point is to show that the merchant understands its legal position without turning the letter into a legal brief.
The demand section states clearly what the merchant wants. It specifies the dollar amount that must be repaid, broken down if there are multiple transactions, and explains how the amount was calculated. It provides explicit instructions for how to make payment, such as by check to a specific address, by wire transfer to specific account details, or through an online payment link. It sets a firm deadline, typically ten to fourteen days from the date of the letter, by which payment must be received in full.
Many letters include a paragraph offering to consider reasonable settlement proposals if the customer cannot pay the full amount immediately, such as a payment plan spread over several months. This can increase the response rate without weakening the merchant’s position, as long as it is framed as a limited-time offer conditioned on the customer responding by the deadline.
The consequences section explains what will happen if the deadline passes without payment or a settlement proposal. The typical consequence is that the merchant will file a lawsuit in small claims court or other appropriate venue to collect the debt, plus court costs and interest where allowed by law. The letter should state this clearly and factually, without exaggeration. If the merchant intends to report the debt to credit bureaus or engage a collection agency, those actions can be mentioned, but only if the merchant actually plans to take them and understands the regulatory requirements for doing so.
The closing typically includes a reservation of rights, stating that nothing in the letter waives any of the merchant’s claims or remedies, that the letter is an attempt to resolve the matter without litigation, and that the merchant reserves the right to pursue any and all legal theories if the matter is not resolved voluntarily. It provides contact information for the person the customer should reach out to, and in some cases explicitly invites the customer to contact the merchant if there is any legitimate reason why the charge should not have been processed or if there are facts the merchant is not aware of.
Small Claims Court as the Credible Next Step
For a demand letter to be effective, the threatened consequences must be real and proportionate. In most friendly fraud cases, the credible next step is small claims court, not a multi-million-dollar lawsuit or criminal prosecution.
Small claims courts were designed to provide accessible justice for disputes involving relatively modest amounts of money. In California, individuals and sole proprietors can file small claims actions for up to $12,500, while corporations and other business entities face a lower cap of $6,250. Many other states have similar structures with limits typically ranging from $3,000 to $10,000. This means that the typical chargeback involving a few hundred to a few thousand dollars in disputed charges falls squarely within small claims jurisdiction.
The California courts maintain extensive online self-help resources that explain the small claims process in detail, including how to determine if small claims is the right venue, how to calculate whether the claim is within the dollar limit, how to prepare and file the claim, how to properly serve the defendant, and what to expect at the small claims hearing. These guides are written for self-represented litigants and walk through each procedural step. Merchants in other states can typically find similar resources on their state court websites.
Small claims procedures are streamlined compared to regular civil litigation. Filing fees are low, usually between $30 and $100 depending on the claim amount. Formal discovery is generally not available, which keeps costs down but also means both sides must bring all their evidence to the hearing. The case is decided by a judge, not a jury, in a relatively informal setting where technical rules of evidence are relaxed. Hearings are usually scheduled within a few months of filing, providing faster resolution than regular court.
The main limitations are the damages cap and the fact that attorneys cannot represent parties at the hearing in some jurisdictions, though they can help prepare the case. For friendly fraud disputes under a few thousand dollars, these limitations are usually not significant. The merchant’s evidence file, if properly assembled, tells a clear story that a judge can understand quickly: the customer ordered and received the product, used it, and then falsely disputed the charge.
When drafting the demand letter, the merchant should reference small claims court specifically and accurately. The letter might include language such as: “If we do not receive payment or a settlement proposal by [date], we will file a claim in small claims court to recover the amount owed plus court costs. The California small claims court allows businesses to pursue debts up to $6,250, and we will use that forum to seek a judgment against you.” This language is factual, proportionate to the dispute, and demonstrates that the merchant has thought through the next steps.
Filing a small claims case and then dismissing it after the customer pays is a standard and acceptable practice. The filing itself creates urgency and shows the merchant was serious. If the customer pays before the hearing date, the parties can execute a settlement agreement and the merchant can dismiss the case voluntarily. If the customer does not respond at all, the merchant can seek a default judgment and then pursue collection through wage garnishment or bank levies if necessary.
Practical Considerations When Pursuing Individual Customers
Friendly fraud demand letters present tactical challenges that differ from standard commercial collection. The customer is often an individual consumer, not a business, which means different communication dynamics and collection realities.
Individual consumers may be unsophisticated about contract law and genuinely believe that if their bank credited the charge, they have no further obligation. They may have been coached by friends, online forums, or even bank representatives to simply dispute charges they are unhappy with rather than dealing with merchants directly. Some did not realize that using the chargeback process for buyer’s remorse or service dissatisfaction is inappropriate. Others know exactly what they are doing and are counting on the merchant not bothering to pursue them individually.
The demand letter must account for this range. For the genuinely confused customer, the letter’s factual recitation and explanation of the legal situation may be enough to prompt payment. For the deliberate abuser, the letter signals that this merchant is different from the many others who simply accept friendly fraud losses as a cost of doing business.
Collecting from individuals also presents practical challenges. Unlike businesses that have business bank accounts and business addresses, individual customers may be harder to locate if they move. Wage garnishments are possible after obtaining a judgment, but they require knowing where the person works and involve additional legal procedures. Bank levies can work if the customer has funds in identifiable bank accounts, but locating those accounts is not always straightforward.
These realities mean that merchants need to be selective about which friendly fraud cases justify demand letters and potential litigation. Cases involving higher dollar amounts, repeat offenders who have filed multiple chargebacks, or customers who have made particularly egregious false statements are better candidates than isolated small-dollar disputes where the customer may have been confused.
Geography matters too. If the customer is in a distant state and the merchant’s terms of service do not include a strong forum selection clause, enforcement becomes significantly more complicated. A judgment obtained in California may need to be registered and enforced in another state under that state’s procedures. For international customers, collection is often impractical unless the amounts are substantial.
The merchant should also consider the customer’s apparent financial situation. If the customer has already filed for bankruptcy or there are indications they are judgment-proof, spending time and money on a demand letter and small claims case may not be worthwhile. On the other hand, if the customer appears to be employed, has a social media presence suggesting they are financially stable, and lives at a permanent address, collection has a better chance of success.
When Customers Respond with Counterclaims or Threats
Not every customer who receives a friendly fraud demand letter quietly pays. Some respond with their own legal threats, claims of harassment, or demands that the merchant cease contact. Others raise service problems or disputes that may or may not be legitimate.
A common response is for the customer to claim that the merchant’s product or service was defective, did not work as advertised, or failed to meet their expectations, and that the chargeback was therefore justified. If this defense appears for the first time in response to the demand letter, after months of usage without any complaints, it is likely a pretextual justification created after the fact. The merchant’s response should point to the customer’s extended usage, lack of any support tickets or complaints before the chargeback, failure to follow any contractual dispute resolution procedures, and any communications showing satisfaction with the product.
However, if there is documentation of legitimate service issues that the merchant failed to address, or if the merchant’s marketing made specific promises that were not delivered, the customer’s position may have some merit. In those situations, the merchant should evaluate whether a partial refund or settlement makes more sense than proceeding with a hardline collection posture.
Another response is for the customer to threaten to report the merchant to regulatory agencies, file complaints with the Better Business Bureau or state attorney general, or post negative reviews online. These threats should not cause the merchant to abandon a legitimate claim, but the merchant should be mindful that its own correspondence should be professional and factual so it can withstand public scrutiny if the customer does follow through.
Some customers threaten to countersue for harassment, emotional distress, or violation of debt collection laws. The Fair Debt Collection Practices Act and state equivalents impose restrictions on collection communications, but they generally apply to third-party debt collectors, not to creditors collecting their own debts. However, some states have broader consumer protection laws that can apply to creditor communications. Merchants should ensure their demand letters are factual, not abusive or harassing, and should limit the frequency of follow-up communications if the customer asks them to stop.
If the customer raises legitimate legal defenses or counterclaims, the merchant must evaluate them objectively. Sometimes the most practical outcome is a mutual settlement where both sides compromise rather than spending time and money on litigation. If the customer’s responses are clearly frivolous or pretextual, the merchant can send a brief follow-up letter refuting the claims and reiterating the deadline, but should avoid getting into an extended back-and-forth that just delays resolution.
Building a Repeatable Friendly Fraud Response System
Merchants who face chargebacks regularly should treat friendly fraud demand letters as part of a broader chargeback management system rather than as isolated reactions to individual disputes.
The system should begin with prevention. Merchants can reduce friendly fraud by using clear billing descriptors that help customers recognize charges on their statements, sending immediate and detailed post-purchase confirmation emails, providing responsive customer service that resolves issues before they escalate to chargebacks, maintaining detailed records of all transactions and customer interactions, and implementing fraud detection tools that flag high-risk transactions before they are processed.
When chargebacks do occur, the system should include an immediate evidence collection protocol. As soon as a chargeback notification arrives, the merchant should pull the complete file: contract terms, order details, delivery records, usage logs, and communications history. This file should be compiled in a standard format whether or not a demand letter will ultimately be sent, because it serves multiple purposes: it is needed for the network representment, it supports the demand letter if one is sent, and it provides the evidence for small claims court if the case proceeds that far.
The next step is a triage decision. Not every chargeback justifies a demand letter. Merchants should establish internal criteria for when to pursue customers directly. Criteria might include a minimum dollar threshold, evidence that the chargeback was clearly fraudulent rather than a legitimate dispute, the customer’s response history, and whether this is a repeat offender.
For cases that meet the criteria, the demand letter should be sent promptly after the network dispute process concludes or in parallel with it if the merchant has already determined the evidence is strong. The letter should be tracked with delivery confirmation so there is proof the customer received it.
After the deadline in the demand letter passes, there should be a decision point: file in small claims court, engage a collection agency, accept the loss and move on, or offer a final settlement proposal. This decision should be made consistently based on the same factors used in the initial triage.
For merchants handling significant chargeback volumes, technology can help. Stripe, Chargebee, and other payment platforms offer chargeback alerting and evidence management features that partially automate the evidence collection process. Some third-party services specialize in chargeback representment and can handle the network dispute process, freeing the merchant to focus on direct customer collection for the clearest friendly fraud cases.
Improving Contracts and Policies to Strengthen Your Position
Every friendly fraud dispute is an opportunity to improve the merchant’s contracts and policies so future disputes are easier to win.
Terms of service should include explicit provisions addressing chargebacks. A typical provision might state that the customer agrees to first contact the merchant directly about any problems with a transaction before filing a chargeback, that the customer acknowledges chargebacks result in fees and administrative costs to the merchant, and that the customer will reimburse the merchant for those costs if the customer files a chargeback that is later determined to be without merit. While such provisions may not always be enforceable depending on jurisdiction and circumstances, they create a contractual hook that strengthens the merchant’s demand letter.
Refund and cancellation policies should be clear, prominently displayed, and consistently applied. If the merchant offers a 30-day money-back guarantee, that should be stated clearly on the checkout page and in confirmation emails. If certain products or services are non-refundable, that restriction should be highlighted before purchase. Clear policies reduce confusion that might lead customers to use chargebacks out of frustration.
For digital products and subscriptions, merchants should implement robust authentication and usage tracking. Requiring email verification, logging IP addresses and device information at signup and login, tracking feature usage and engagement metrics, and recording all customer interactions create an evidence trail that makes friendly fraud much harder to get away with.
Order confirmations and fulfillment notices should be detailed and immediate. An email sent within minutes of purchase that confirms the order details, restates the key terms, provides access instructions, and offers customer support contact information helps ensure the customer cannot later claim ignorance.
Forum selection and choice of law clauses in the terms of service allow the merchant to designate where disputes must be litigated and which state’s law applies. A California merchant might include: “Any dispute arising from this agreement shall be resolved exclusively in the courts located in Los Angeles County, California, and shall be governed by California law.” These clauses are generally enforceable in commercial contexts and can make it much easier and cheaper for the merchant to pursue collection because they can sue in their home jurisdiction rather than traveling to wherever the customer is located.
Finally, merchants should consider implementing a “known friendly fraud offender” database, either internally or through third-party fraud prevention services. Customers who have filed multiple clearly fraudulent chargebacks can be blocked from making future purchases, preventing repeat abuse.
FAQ
If a customer files a chargeback and the issuing bank credits their account, does that mean I have no legal recourse against the customer?
No. The bank’s decision to credit the cardholder is made under federal consumer protection regulations that govern the bank-customer relationship. Those regulations do not eliminate the contractual obligations between you and the customer. If the customer received goods or services from you and then used the chargeback process to avoid payment, you can pursue civil claims against the customer for breach of contract, unjust enrichment, and potentially fraud. The bank’s internal procedures and your direct legal claims against the customer operate on separate tracks. Many merchants are not aware of this and simply accept chargeback losses, but you have the right to pursue the customer directly for amounts they legitimately owe.
How do I know if a chargeback is friendly fraud versus a legitimate dispute that I should not fight?
Look at the objective evidence. Friendly fraud typically involves clear proof that the customer received and used what they paid for, combined with a chargeback claim that directly contradicts that evidence. Examples include delivery tracking showing the customer signed for a package but the customer claimed non-delivery, login logs showing extensive use of a digital product but the customer claimed the charge was unauthorized, or the customer having a history of similar purchases without dispute but suddenly claiming this one transaction was fraud. In contrast, legitimate disputes usually involve documented service problems, genuine non-delivery, material deviations from what was promised, or evidence of actual unauthorized use by a third party. If you have any doubt about the legitimacy of a customer’s complaint, review your own performance honestly before sending an aggressive demand letter.
Should I send a demand letter before or after fighting the chargeback through my payment processor?
Usually after, or at least in parallel once you have completed your representment submission. The card network dispute process has tight deadlines, typically seven to twenty-one days depending on the card brand. You need to respond through your processor within that window to preserve your right to recover funds through the payments system. While preparing that response, you will be gathering the same evidence you need for a demand letter. Once you have submitted your representment evidence, you can use that same documentation to draft the demand letter. Some merchants wait to see the outcome of the network dispute before sending the letter so they can accurately describe what happened, while others send the letter immediately after submitting representment evidence to put maximum pressure on the customer. Both approaches can work depending on your timeline and how clear-cut the fraud is.
What amount should I demand in the letter – just the transaction amount, or can I add chargeback fees and other costs?
You can demand the transaction amount plus any fees and costs you actually incurred as a result of the chargeback, such as the chargeback fee charged by your processor, any penalty fees if your chargeback rate is elevated, and reasonable costs of collection including attorney fees if your contract allows them. Be specific about how you calculated each component and attach documentation such as processor statements showing the fees charged. Do not inflate the amount or include speculative damages. If your contract specifically authorizes late fees or interest, you can include those as well, but only if the contract clearly states the rate and calculation method. Demanding amounts that are not actually owed undermines your credibility and can expose you to counterclaims.
Can I report the customer to the police for fraud if they filed a false chargeback?
Technically, filing a false chargeback under circumstances that meet the elements of criminal fraud could be prosecuted, but practical reality is that police and prosecutors rarely pursue these cases. Card fraud involving stolen cards is investigated, but first-party misuse of the chargeback system is generally treated as a civil matter. More importantly, you should not threaten criminal prosecution in your demand letter as a tactic to force payment. California’s extortion laws and rules of professional conduct prohibit conditioning the decision to file criminal charges on whether someone pays a civil debt. Your demand letter can mention in general terms that friendly fraud may violate criminal statutes and that you reserve all rights including reporting fraud patterns to appropriate authorities, but it should not say “pay me by Friday or I will report you to the police.” That crosses the line into improper threats.
What if the customer is in another state or country – can I still pursue them?
Yes, but enforcement becomes more complicated. Your terms of service should include a forum selection clause that requires disputes to be litigated in your home jurisdiction. Even without such a clause, you can usually sue in your own state’s small claims court if the transaction occurred there or the contract was formed there. If you win a judgment in your state, you will need to register and enforce it in the customer’s state under that state’s procedures if they do not pay voluntarily. Most states have adopted the Uniform Enforcement of Foreign Judgments Act, which provides a streamlined process for registering out-of-state judgments. For international customers, enforcement depends on whether there are treaties or reciprocal enforcement agreements between the countries. International collection is difficult and expensive unless the amounts are substantial, so you may need to focus on other pressure points such as credit reporting or simply accepting that some international disputes are not economically viable to pursue.
If I terminate the customer’s account or access as a result of the chargeback, can that hurt my legal position?
It depends on what your contract says about termination rights. If your terms of service clearly state that you can suspend or terminate access immediately for nonpayment or for filing a chargeback, then exercising that right is proper and actually strengthens your position by showing you take contract enforcement seriously. If your contract requires notice before termination or gives the customer a cure period, you must follow those procedures. Even if you have the contractual right to terminate immediately, consider whether doing so before sending the demand letter makes strategic sense. Shutting off access creates pressure for customers who are still using the service, but it also eliminates that leverage if they do not care about access anymore. In many cases, the better sequence is to send the demand letter while access is still active but flagged for termination, giving the customer a deadline to pay before you cut them off.
What happens if the customer responds to my demand letter by offering to settle for less than the full amount?
Evaluate the offer based on the strength of your evidence, the time and cost of pursuing full collection, and the likelihood of actually collecting if you proceed to litigation. If your case is very strong, the amount is significant, and the customer appears financially capable of paying, you might reject a lowball offer and proceed with filing suit. If the debt is older, your evidence has some weaknesses, or the customer’s financial situation is uncertain, accepting 50 to 70 percent of the amount in exchange for a full release can be practical. Always document any settlement in writing before accepting payment, require payment by wire transfer or cashier’s check rather than methods that can be reversed, and include mutual releases and non-disparagement provisions. Do not release your claims until the payment has actually cleared.
Should I hire an attorney to send the demand letter or can I send it myself?
For straightforward friendly fraud cases with clear evidence, you can send the demand letter yourself on company letterhead, as long as you are careful about the tone and avoid improper threats. A letter from an attorney carries more weight because it signals you are serious about pursuing legal action, but it also costs more. A practical approach is to send your own demand letter first for smaller amounts and use an attorney’s demand letter for larger disputes, repeat offenders, or cases where you anticipate needing to file suit anyway. If you do send your own letter, have an attorney review a template version first to ensure it does not contain language that could create legal problems. For amounts under a few thousand dollars where small claims court is the realistic next step, self-help demand letters can be effective if they are well-written and supported by strong evidence.