Back to BlogFriendly Fraud: How to Get Your Money Back
Friendly fraud is a nerve-wracking term for online retailers. This isn’t surprising when you consider that behind these two words is a genuine customer disputing a transaction. It’s a complicated concept that leads merchants to question whether a loyal customer or a fraudster made the claim.
You need to do everything in your power to reduce the likelihood that customers will dispute legitimate transactions to avoid the costly chargeback dispute process. Fortunately, there are tried-and-true methods for reducing chargebacks from legitimate customers, saving your company from massive losses.
But, first things first.
What is Friendly Fraud?
Friendly fraud happens when a cardholder wrongly requests a chargeback for a legitimate purchase. It can be caused by a customer’s mistake or confusion or the chargeback can be filed on purpose.
The bad news is that friendly fraud is the #1 fraud attack source and it’s expected that by this year it will account for more than 60% of all chargebacks issued in the United States. According to Statista, in 2021, approximately 5.89 billion U.S. dollars were paid out to online fraudsters.
One of the reasons for this increase is that the adoption of EMV chip cards has made it harder for fraudsters to commit a crime in physical stores, so they have moved to the online world.
What are the Reasons for Friendly Fraud?
There are a variety of reasons for friendly fraud. Here are a few examples:
- A cardholder files a chargeback when a family member uses the card without their knowledge.
- A customer finds it challenging to understand the descriptor on a bank statement (this is why we highly recommend setting up explicit transaction descriptors).
- A cardholder may mistakenly dispute a charge because they forgot about the purchase.
- The cardholder purposefully disputes a transaction because they regret it and want their money back.
- The purchased product doesn’t meet expectations or is defective.
- A customer is attempting to conceal a purchase from a spouse.
As you can see, friendly fraud has many reasons, so it’s important that merchants are prepared.
Consider this:
Some customers request chargebacks for personal gain. Determining whether the cardholder is being truthful can be difficult. It may sound harsh, but you must face the fact that some customers play dirty.
The reality is that some consumers unintentionally commit friendly fraud. Even though they have the best intentions, as the name implies — friendly fraud can be committed by “friends” of your business. Despite it sometimes being unintentional, it can still have a damaging impact on online businesses and issuers. For most customers, filing a chargeback is more convenient than contacting the merchant, so you won’t even have a chance to stop it.
Eight out of ten admit they’ve filed a chargeback out of convenience. Most of the time, consumers are either unaware (or just don’t care) that this comes at an additional expense to retailers. As you may know, chargebacks involve more than just the money charged; they also cost the loss of merchandise that has been shipped, the price of shipping the goods or service fees, processing fees, etc. With all of the costs associated, chargebacks should be — without a doubt — a major concern for businesses, especially as their online business starts to scale.
The following are some tips and techniques that will assist you in preventing friendly fraud attacks on your business.
Payment Solutions Packed With Security Tools
While it’s hard to eradicate fraud, you can successfully reduce it by collaborating with a trustworthy payment processor. Before deciding on which payment gateway to utilize for your business, ask about the security solutions it offers to ensure that your company is well-protected. Or, if you already have a payment gateway in place, evaluate your existing provider’s security solutions — it may be time to make a change.
Look for a set of anti-fraud tools that score risk based on rules. And be sure to note that it’s better when the system can be adjusted to a specific industry rather than a static solution with the rules that apply to every business model. Solutions based on standard scoring may block legitimate transactions labeled as suspicious by the system.
Remember that Reason Code 75 — “Transaction not Recognized” — has been eliminated in the Visa Claims Resolution. As a result, transactions that customers claim they didn’t authorize might easily be classified as fraud. The merchant must then provide the necessary compelling evidence.
Overall, your business needs a multi-level risk protection system that can adjust to emerging fraud patterns in real-time to identify activity that swiftly raises a red flag. Advanced verification that requires a fingerprint or facial recognition (which works great on mobile devices) can also help with security.
3D Secure Authentication
It’s becoming more challenging for a customer to dispute an unauthorized transaction thanks to 3D Secure, which verifies a customer’s card with the bank throughout the purchasing process.
3D Secure version 2 provides frictionless authentication across multiple platforms, including mobile environments. With 3D Secure 2, static passwords are replaced with tokens and biometrics, so authentication occurs while the user is still on the merchant’s website or app.
A solution like this doesn’t interrupt the checkout experience for ecommerce customers or app users. As a result, cart abandonment rates are reduced and user experience is improved thanks to the combination of frictionless flow and faster, more secure payments.
Effective Communication With Customers
Make sure customers know how to reach you. You can reduce the number of chargebacks for unhappy customers and misunderstandings by providing excellent customer service. In some cases, contacting a customer directly can be beneficial — especially if they don’t recognize a legitimate charge.
When running an ecommerce website, consider making customer service available 24 hours a day, seven days a week. Customers who know they can get answers to their questions at any time are less likely to commit friendly fraud against you.
It’s important to do anything you can to avoid a situation in which a customer dispute escalates to a chargeback. So, contact the customer as soon as you receive a complaint or notice that they intend to file a chargeback. The more responsive you are, the more likely it is that it won’t affect your chargeback ratio.
Moreover, copies of all electronic communications always help in the case of a chargeback, so keep it archived for at least 30 days.
Return Policy and Delivery Tracking
Having a delivery-tracking mechanism in place will assist you in determining whether a customer received their order. It’s also a good idea to collect signatures to show proof of delivery to the cardholder’s shipping address. When a signature is required, you’ll have a paper trail that may be useful if you need to submit evidence under the representment process.
Return and refund policies don’t guarantee that friendly fraud will not occur; however, it’s important to clearly present such information on your website to ensure that customers are aware of your policies. They can use the chargeback process to get their money back if they can’t find any information about the returns or refunds.
Take Control of Your Payments
The scope of friendly fraud is vast and it’s a severe problem for online sellers because it’s challenging to detect and not that easy to fight. In short, friendly fraud refers to a legitimate transaction rather than typical fraudulent behavior, so fraud prevention tools rarely catch it.
Friendly fraud varies by industry, so sticking to tried-and-true solutions and having security tools easily tailored to your specific business are necessary steps to reduce this type of fraud. Otherwise, it can be a significant financial burden on your business.