How Merchants Can Combat the Growing Threat of Friendly Fraud

How Merchants Can Combat the Growing Threat of Friendly Fraud

E-commerce has become one of the most popular go-to shopping channels for consumers. Yet as e-commerce sales have grown, so has the number of chargebacks. In particular, customers are increasingly engaging in friendly fraud, which is when disputes are filed on legitimate transactions. Friendly fraud is damaging and costly for online merchants, and unfortunately, it is becoming more common — according to the 2021 Chargebacks911 Field Report, over 80% of merchants surveyed admitted to experiencing an increase in friendly fraud attacks over the past three years. The good news, though, is that there are things that merchants can do to reduce the odds of these disputes. In this blog post, we’ll give an in-depth overview of friendly fraud and share some ways businesses can combat it. Let’s get started!

What is Friendly Fraud?

As mentioned, friendly fraud is a type of chargeback in which a cardholder disputes a legitimate transaction as fraudulent. While sometimes this is done by mistake, it is often done with the intent of getting money back. As you can see, the name “friendly fraud” is misleading, as it is often not so friendly after all. Its name distinguishes it from true fraud chargebacks in which the transaction was made with stolen card data.

Reasons Why Friendly Fraud Occurs

Although friendly fraud is usually malicious, it can also result from a misunderstanding. Here are some common scenarios that can lead to friendly fraud chargebacks:

  • Unfamiliar Transactions

If a cardholder doesn’t recognize a charge on their statement, they may dispute that transaction. For example, if a customer made a purchase and then forgot or doesn’t recognize the billing descriptor on their statement, they may contact their bank and ask that charges be removed from their account.

  • Family Fraud

Family fraud is when someone in the household uses a credit card without notifying the cardholder. Some common scenarios include unauthorized users making purchases on streaming services, paying for videos and games in in-app purchases, or even charging a phone bill or utility bills. In some cases, it’s accidental, like when a child makes an in-app purchase or charges a phone bill on their parent’s account. This type of fraud is usually not malicious, but it’s a good idea to keep an eye on your statements in case you notice any rogue charges.

  • Hassle of Returning

The return and exchange process can be tedious for customers, causing them to file a chargeback. Customers who are unhappy with a product or service will sometimes dispute the authenticity of the original transaction and claim it was fraudulent — simply to bypass the hassle of having to make a return and wait for a refund.

  • Customer Dissatisfaction

Oftentimes, customers turn to chargebacks when they are feeling buyer’s remorse or dissatisfaction with a purchase. Poor quality products, or products that don’t match their descriptions, are more likely to incur chargebacks.

Consequences of Friendly Fraud for Merchants

Friendly fraud can result in serious financial losses for merchants, forcing them to absorb additional costs associated with false claims and essentially lose out on sales. According to the National Retail Federation, losses from friendly fraud cost merchants more than $25 billion per year. In addition to the costs associated with the loss of a product or service, other losses may be incurred due to friendly fraud disputes. For example:

  • Costs of fulfillment and other overhead fees associated with the transaction, such as shipping and handling. 
  • Merchant services account termination due to a high number of chargebacks; the bank may close the merchant’s account if they receive too many transaction disputes.
  • Damages to the business’s reputation.
  • Decrease in overall customer loyalty and satisfaction.

Tips to Prevent Friendly Fraud

While chargebacks can never be entirely prevented, there are things you can do to reduce their occurrence. Here are some suggestions for reducing friendly fraud chargebacks:

  • 1. Display Accurate Descriptors on Statements

If a customer doesn’t recognize a transaction on their bank statement, they may initiate a chargeback. That’s why it’s important to use a merchant descriptor on statements that matches the customer-facing name of the business. You should also consider including a phone number for customer service inquiries, as this will ensure that the customer can reach out to you directly before the issue escalates to a chargeback.

  • 2. Request Signatures On Return Policies

To avoid losing chargeback disputes, it’s essential that you provide clear return policies and obtain the customer’s proof of consent — typically via a written signature or selection of a checkbox online. It’s important to keep in mind that your policies should be reasonable; for example, if the time frame for returns is too short or there are other unreasonable restrictions, customers will be more likely to file friendly fraud chargebacks.

  • 3. Have Accessible Customer Service

It’s essential to have a competent customer support team on hand and to clearly display contact information online. This will make it easier for customers to request refunds or express their concerns, rather than resorting to a chargeback.

  • 4. Provide Order and Shipping Updates

Providing delivery and status updates and requiring a signature upon retrieval will not only assure your customer that their order is on the way, but it will also serve as helpful evidence in the event that the customer does file a friendly fraud chargeback.

  • 5. Process Refunds Promptly

It is crucial to process refunds in a timely manner; otherwise, customers may go directly to their credit card processing bank to file a dispute.

  • 6. Maintain Important Documentation

Maintaining key records will allow you to respond to chargebacks much more effectively while upping the odds that you will win the dispute. Some important records to have on hand include receipts, shipping records, signed delivery forms, and signed return policies.

  • 7. Respond to Chargebacks Promptly

In the event that a chargeback is filed, you should respond as quickly as possible with proper documentation to improve your chances of winning the dispute.

Reduce Fraud and Increase Security with a Payment Gateway

Friendly fraud is, unfortunately, just one of many fraudulent tactics striking e-commerce merchants hard. That’s why, in addition to taking steps to improve your customer’s overall experience, it’s important to implement secure technology like a payment gateway. Many of today’s leading payment gateways come with data tokenization, fraud filters, and built-in fraud screening to reduce the likelihood of legitimate fraud. As the digital economy continues to grow and evolve, businesses need to equip themselves with the right fraud management tools. These tools can help fight true fraud cases and may at times prevent friendly fraud.

Cardknox’s secure payment gateway is equipped with an extensive array of security features and a dedicated support team to help reduce friendly fraud. Contact us today to learn more about our premium security features and best practices to fight friendly fraud.