Friendly Fraud Costs

March 23, 2022 | 9 min read

Friendly fraud cost

Friendly Fraud Costs: Gauging the True Impact of Chargeback Abuse

As a merchant, you should be well-aware of friendly fraud by now.

It’s a common problem for online sellers. In fact, it’s such a ubiquitous issue that many merchants simply accept it as a “cost of doing business.” Does it have to be, though?

What does friendly fraud cost you over the long and short term? What are the direct and indirect friendly fraud consequences you face? And, most importantly, how can you mitigate losses and recover revenue?

This article will address friendly fraud costs by explaining why it happens and its impact on eCommerce. We’ll also look at the losses associated with it, and the steps you can take to prevent it.

But, let’s start by looking at why cardholders might prefer chargebacks to traditional returns.

Why Does Friendly Fraud Happen?

There are many reasons why a cardholder might resort to friendly fraud, and not all of them are malicious.

As we mention often, friendly fraud operates in a ‘gray area’ that is difficult for banks and merchants to diagnose. Because of this, many accounts of friendly fraud either go unnoticed or are mistaken for something else. This is a serious matter; if merchants can’t recognize genuine chargeback sources, they can’t deploy the right solutions to address the problem.

So, what are some examples of friendly fraud? It could result from a cardholder:

  • forgetting they ordered the item or missing the return window
  • not receiving a refund they requested on time

These are just a few examples. They’re also largely accidental These acts are not malicious, but they cause the same problems as deliberate chargeback abuse.

It can be challenging to discern between a legitimate dispute and an act of friendly fraud. As a result, banks tend to take the most expedient action and err on the side of their cardholder without much investigation. No bank wishes to accuse a customer of dishonesty without hard evidence, which could lead to consumer backlash. Thus, friendly fraud is a rising problem that affects everyone involved.

Learn more about friendly fraud

Now that we've got that out of the way, let’s have a look at the specific costs associated with friendly fraud.

Friendly Fraud Costs: The Industry Overview

Aside from the time spent worrying about and responding to chargebacks, the elephant in the room here is the cost of friendly fraud. Just how much do friendly fraud chargebacks impact your bottom line?

Our research suggests that friendly fraud will represent 61% of all chargebacks by 2023. At the same time, the average chargeback costs $191, with merchants bearing more than two-thirds of the financial impact.

Additional data from Mastercard shows that global chargeback volume reached 615 million in 2021. So, if we do some basic math:

Shocking, isn’t it? Well, despite this figure, the average merchant self-reports that only 28% of their chargebacks are acts of friendly fraud. This is a severe underestimate that can affect eCommerce on the whole. So, what’s going on here? Where do these friendly fraud costs come from?

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There seems to be a significant disconnect with merchants on the topic of friendly fraud. Although friendly fraud represents a majority of chargebacks, merchants still attribute more chargebacks to criminal activity than to deliberate abuse.

Here are a few startling facts that illustrate this point:

1. Many cardholders believe chargebacks are “more convenient” than returns

2. Half of friendly fraud cases are accidental

3. Bad habits develop quickly

At this stage, close to 1 in 4 online businesses have a chargeback rate exceeding 1%. 80% of merchants report a chargeback rate above 0.6%. And, these numbers will undoubtedly rise year after year, at this rate.

Friendly Fraud Costs: Taking a Closer Look

Friendly fraud costs are a big problem. However, there’s no explicit ‘one-size-fits-all’ solution. That’s because there are several ways in which friendly fraud can cost you money:

Lost Sales Revenue

One of the first things to consider here is that you lose the original cost of the item you sold. This might not seem like a massive deal for merchants who sell t-shirts or other lower-cost products online. But, if your products are more expensive—furniture, electronics, or other high-ticket items—your losses can be considerably higher.

Lost Merchandise

Another incidental loss resulting from friendly fraud is the item itself. Your merchandise doesn’t come cheap. Even with a product return, at least you can recover the merchandise and resell it to another customer if it’s still in good condition. If a customer hits you with a chargeback, though, that means you lose valuable inventory, and have no opportunity to resell it.

Overhead Costs

Let’s not forget: one of the most significant friendly fraud impacts is lost time and effort. Things like facility rentals, utilities, shipping, logistics, and interchange fees are all entirely wasted on friendly fraud chargebacks. The same goes for labor and time invested in producing and listing products. Overhead costs like these add up incrementally, but they translate to a serious liability with each additional chargeback issued.

Fees & Penalties

The average acquirer imposes chargeback fees; typically between $20-100 per chargeback. These fees are meant to cover their costs as a result of the chargeback, which they pass along to you. Even if you fight—and win—the chargeback, you don’t recover the chargeback fee levied by the bank. So, you never get any of this money back.

Hidden Friendly Fraud Costs

Some of the costs incurred by friendly fraud aren’t as apparent after just one chargeback. However, the consequences of incurring a higher chargeback ratio will add up over time.

A higher chargeback ratio could force you into a Chargeback Management Program like the Visa Dispute Monitoring Program, or the Mastercard Excessive Chargeback Program. You could face costly restrictions and punishing enforcement measures in these programs. And, if you’re still unable to fix the problem, it could mean losing your banking privileges, and your right to process card payments entirely.

You could be forced to seek out a high-risk merchant services provider. While this comes with more leeway in terms of chargebacks, these services do not always come cheap.

So, all that said: what can you actually do to limit how friendly fraud impacts your business?

There is only one way you can drastically lower your chargeback ratio and protect yourself from the costs associated with friendly fraud. You need to invest in a comprehensive strategy to fight friendly fraud in the short term, and to prevent friendly fraud from happening whenever possible.

5 Tips to Reduce Friendly Fraud Costs

If you want to take your chargeback strategy to the next level, investing in a better strategy is the right move. Here are five proven best practices can help you reduce the costs and fees associated with friendly fraud chargebacks:

Tip 1 | Never Let Friendly Fraud Go Unchallenged

As we mentioned above, friendly fraud is the leading cause of chargebacks. It's also the trickiest, by far. Our advice is to pay close attention to chargeback issuances. If you identify a chargeback as friendly fraud, you need to fight back through tactical representment. As we said, the more people you let get away with friendly fraud, the bigger the problem will get.

Tip 2 | Be a Customer Service Pro

You can avoid some friendly fraud chargebacks by making it easier for customers to reach out to you. This means providing prompt, helpful responses to all phone, email, and social media inquiries and making sure your contact information is easily visible.

Tip 3 | Clarify Your Policies

If your policies are murky, then you’re asking for chargebacks. Don’t surprise your customers with hidden fees. Be clear and upfront with all policies. The same goes for additional costs like sales tax and shipping. Also, your return policies should be explained thoroughly to customers, and should be easy to interpret.

Tip 4 | Mind the Details

Billing descriptors, logos, charges, and other pertinent merchant information should all be easily identifiable to your customers. Lots of friendly fraud chargebacks happen because merchants failed to include these identifying details. Cardholders then mistake the transaction as fraudulent as a result.

Tip 5 | Know When You Need Help

Still struggle to prevent illegitimate chargebacks and reduce friendly fraud costs? Maybe you could use a little help. Companies that struggle with an elevated rate of chargebacks per month may lack the in-house tools and staff required to meet and answer this demand appropriately.

With over a decade as a leader in the payments industry, Chargebacks911 is uniquely placed to help your business navigate the cost of chargebacks and save you time and revenue. Give us a call and learn how much you can save today.

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