Friendly fraud is a growing phenomenon that affects merchants on a global scale. It is the process that consumers follow to get a refund for products or services that they purchased without speaking directly to the merchant from whom they made the purchase. There are several parties involved in friendly fraud cases.
Here, we will define friendly fraud and discuss the ways it can impact your business. We will also provide some helpful hints on how to fight and/or prevent friendly fraud.
Friendly Fraud Table of Contents
Friendly fraud is a situation in which a consumer sees a transaction on their credit card statement and calls their bank to dispute it, rather than reaching out to the merchant directly. When the consumer calls their bank, the chargeback process is initiated. There are several steps in the chargeback process that you should be aware of.
- The consumer files a dispute with their bank
- The bank typically issues a temporary refund to their client
- The bank will investigate the dispute
- The bank will notify the merchant of the pending chargeback
- The merchant has a finite amount of time in which to respond and provide documentation that the charge is legitimate
- The customer’s bank will review the evidence and make a decision
If the bank rules in favor of their client, the merchant will be required to refund the amount of the transaction. In addition to the refund amount, the merchant will be responsible for fees and other charges associated with the chargeback process.
Friendly Fraud vs. Chargeback Fraud
Friendly fraud and chargeback fraud are the same thing. These two terms can be used interchangeably. The term “friendly fraud” is the result of the nature of chargeback fraud.
For example, if a consumer sees a charge on their statement that they don’t recognize and file a dispute for it, the situation is not always malicious. It could be a simple misunderstanding. It could also be that the customer forgot about the purchase they made.
Friendly fraud is a better description of these types of situations because the intent is not malicious. However, chargeback fraud continues to grow, and many cases are becoming malicious. Keep reading to learn more.
Are Friendly Fraud Chargebacks Common?
Since 2015, chargebacks have grown across most industries. In some cases, they account for as much as 1.5% of a merchant’s transaction volume. This may not sound like much, but when coupled with the fees and other costs of chargebacks, it can have a major impact on your bottom line.
Chargebacks also represent almost 70% of total credit card fraud in the United States. Although friendly fraud began as a simple misunderstanding between consumers and merchants, it has grown into a major problem for many businesses. A better description of many cases is “cyber-shoplifting”.
Cybercriminals have learned that chargebacks are easy to file and have begun to exploit them as a means of shoplifting. They simply make their purchase online or in-store and then dispute the charge with their bank a few days later. If merchants don’t have solid prevention systems in place, they stand to lose a lot of money to these criminals.
Why Do Consumers File Chargebacks?
Some chargebacks are legitimate, and others are not. Here’s a glance at some of the reasons for which consumers file them.
- Don’t Recognize the Charge. Sometimes, consumers don’t recognize the charge when they see it on their statement. They simply see a charge that doesn’t make sense to them and assume it was fraudulent.
- Purchase Made by Someone Else. When consumers have other people living in their household, with access to their accounts such as Amazon or eBay, it’s highly likely that someone else in the household made the purchase without the cardholder’s knowledge. When the cardholder sees the charge, they assume it is not legitimate. We sometimes refer to this a “family friendly fraud”
- The Consumer Forgot About the Purchase. If a cardholder makes a purchase in-store or online and does not check their statement for several weeks, it’s highly possible that they will forget about the charge. When they finally do look at their statement and see the charge, they may not remember it and therefore file a dispute.
- The Customer is Dissatisfied. In some cases, the customer is legitimately unhappy with their purchase. It could be due to poor quality of the product or service, or a lack of communication from the merchant about what to expect when making the purchase.
- Cyber Shoplifting. Unfortunately, many cases of friendly fraud are the result of a cybercriminal taking advantage of the system. Chargebacks were designed to protect consumers from predatory merchants, but the tables have turned drastically.
- Buyer’s Remorse. This happens when a consumer makes a purchase, typically a high-ticket purchase, and later regrets their decision.
Friendly Fraud Prevention
There are tons of reasons for which consumers may engage in friendly fraud. As a merchant, this used to be considered just a cost of doing business. However, it is not an obstacle that many merchants choose to face and find ways to get around it. Here are some things you can do to protect your business from chargeback fraud.
Keep Excellent Records
You must have systems in place that keep excellent records of each consumer and their purchases. Being able to prove that the charge was legitimate is your best defense against a chargeback when it happens.
Use Security Features in Your Payment Gateway
Having the property security features implemented will help protect your business and your consumers. If your gateway asks for various levels of security such as AVS or CVV numbers, it can reduce the number of would-be criminals. Additionally, two-factor authentication or 3D Secure provides another layer of protection for all parties involved.
Dispute Chargebacks Whenever Possible
When a chargeback is presented to you, fight it. We cannot stress this enough. Too many merchants simply allow chargebacks to happen, which causes banks and cybercriminals to continue doing what they’re doing. If a consumer files a chargeback against your business and you know it’s not legitimate, go through the appeal process.
Respond Quickly
You need to respond as quickly as possible when a chargeback is presented to you. In many cases, the banks take a long time to notify merchants of a chargeback. This could leave very little time for you to respond and fight back. However, if you keep excellent records and respond in a timely manner, your chances of winning the chargeback case are much higher.
Setup Your Payment Gateway Correctly
When setting up your payment gateway, you have the opportunity to choose your billing descriptor. This is the name that will appear on your consumers’ statements after they make a purchase from you. Be sure to make this descriptor as clear as possible so the cardholder can recognize it. If your DBA is what the customer knows, then use that instead of your legal entity name. This can help reduce confusion that leads to chargebacks.
Settle Your Transactions Every Day
Settling your card transactions every day can help keep the purchase fresh on your customer’s mind. If they make a purchase today and it appears in their online transaction register tomorrow, they are way more likely to remember the charge and understand why it’s there. Conversely, waiting weeks to batch and settle your transactions will have the opposite effect.
Final Thoughts
“Friendly fraud” is sometimes anything but. If you think you’ve been given a chargeback that is incorrect, take the necessary steps to fight it and build credibility with the bank who presented it. Additionally, take the time to ensure your systems are in place to help protect your business and provide the necessary data you’ll need when you have to fight a chargeback.
