Not all chargebacks result from criminal schemes. Let’s examine a chargeback abuse practice known as friendly fraud–why it happens, and what merchants can do to stop it.
“Friendly fraud.” Sounds like an oxymoron, right?
Stealing revenue from a struggling business doesn’t sound like something a friend would do. So, what exactly makes this practice “friendly?” In short, the term references the fact that the abuse is coming from someone the seller trusts…usually one of their own customers.
In this post, we’ll explain what friendly fraud is and show why it’s become such a major source of loss for merchants. We’ll also show how it works, and outline tips sellers can adopt to protect their revenue from invalid claims.
Friendly fraud happens when cardholders abuse the credit card chargeback system. So, it’ll help if we take a quick look at how chargebacks were designed to work before diving into how they’re abused.
The chargeback system was originally conceived as a consumer safeguard against credit card fraud. It gives cardholders the right to dispute what they feel are unfair or invalid charges. Chargebacks can only be filed for certain legitimate reasons. For example, if:
The bank will investigate the claim. If the consumer’s claim is legitimate, the payment will be reversed. This also guarantees cardholders won’t get stuck with a huge debt if their card is lost or stolen and used to make unauthorized purchases.
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The process still works well…at least when it’s used as intended. It was put into place half a century ago, though; long before the invention of the internet.
The way we shop has changed, but the chargeback system hasn’t. That fact has opened the door to new problems like friendly fraud.
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Friendly fraud occurs when a customer accidentally or deliberately files a chargeback on a legitimate transaction, instead of trying to first obtain a refund from the merchant.
eCommerce grew too fast for the payments industry to respond. This exposed loopholes in the process. More and more consumers are using loopholes in the chargeback process, for example, to bypass merchants and go directly to the bank for a refund.
In short: any time a cardholder requests a chargeback without a valid reason to do so, that customer is committing friendly fraud.
“Fraud” is a pretty vague idea. Generally, when we talk about criminal fraud, we’re talking about a specific criminal act, like stealing someone’s identity to defraud another party. Many of the practices associated with friendly fraud are not actually illegal; in many cases, the cardholder doesn’t even know what they’re doing.
Banks are supposed to investigate every cardholder claim before initiating a chargeback. Sometimes, this manages to expose cardholders for abusing the chargeback process.
But, let’s say a buyer contacts the bank, claiming that the item in question is not as it was described before purchase. That’s somewhat subjective, making it hard to disprove. A dispute can easily become a matter of one party’s word against another’s. Banks want to keep their customers happy, so they have an incentive to take the customer’s side.
This creates a feedback loop. Once cardholders find out how easy (and profitable) it can be to request chargebacks, they can be tempted to do it again. That’s why, according to our data, 40% of cardholders who commit friendly fraud will do it again within 60 days.
We can break friendly fraud down into two main groupings: accidental chargeback abuse, and deliberate chargeback fraud.
Friendly fraud can happen unintentionally through ignorance, or by an honest mistake. The cardholder may be confused, or might misunderstand a charge on their monthly statement.
Family fraud, for instance, is a common source of friendly fraud chargebacks. This happens when a relative of the cardholder, like a child, has access to the cardholder’s payment information and makes a purchase without their knowledge.
Here are some other scenarios that can lead to accidental friendly fraud chargebacks:
Cardholders in these situations are not being malicious. While they may believe a chargeback is justified, their primary intent was to claim their refund. They did not intend to hurt the business on the other end of the chargeback.
On the other hand, we have consumers who intentionally abuse chargebacks for personal gain. These fraudsters know how the system works, and they use it to their advantage.
The most blatant example is a practice known as “cyber shoplifting.” This happens when cardholders buy goods with the intent of filing a chargeback later. It’s theft, pure and simple. It’s no different from taking items from a physical store without paying. In either case, the perpetrator is trying to get something for nothing.
That’s not the only incident that falls under the chargeback fraud mantle. Cardholders might file fraudulent chargebacks due to:
With every chargeback filed, the merchant loses the revenue from the original transaction. Unlike a refund, however, there are additional losses to consider:
Data from LexisNexis shows that the average merchant lost a total of $3.60 in revenue for every $1 in original transaction value. That’s not even accounting for longer-term threats, like potential loss of processing capabilities if the merchant’s chargeback ratio exceeds acceptable limits.
No. While merchants may have to deal with the occasional fraud chargeback, almost all friendly fraud chargebacks can either be challenged or avoided through effective chargeback management.
Merchants bear most of the burden of friendly fraud. However, there are certain drawbacks for consumers, too:
Let’s look at things more broadly. When merchants lose revenue due to friendly fraud, they have to raise prices to compensate for their losses. This hurts everyone eventually.
Let’s get this clear up front: friendly fraud is exceedingly hard to prevent.
Unlike criminal schemes like identity theft or account takeover, friendly fraud is a post-transactional threat. The fraud may not occur for months after the purchase in question.
Fraud filters and detection techniques are almost exclusively designed to identify situations where a card is being used suspiciously. They block transactions prior to card authorization. These technologies have no way to know if a given transaction will turn out to be friendly fraud later, though. On top of that, the fraudster is the actual cardholder, who may be a long-time, trusted customer.
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There are some tactics merchants can adopt to prevent accidental friendly fraud. For example, some card network programs offer automated response programs that can provide additional transaction information in real time. If a cardholder has a question about a charge, tools like Order Insight or onsumer ClarityC can let sellers resolve the query and avoid a chargeback.
There are other basic techniques which merchants should adopt to lower their overall risk of fraud, including:
While all of the above steps will help, targeting friendly fraud before it happens is nearly impossible. That doesn’t mean merchants have to be victims, though.
Chargeback representment refers to the process of countering a customer dispute with new evidence. It’s a powerful tool merchants can use to contest illegitimate chargebacks and potentially win a reversal.
Merchants have the right–and the responsibility–to defend themselves against false claims and recover revenue that would otherwise be lost to friendly fraud. As a bonus, doing so regularly will increase the merchant’s reputation with banks, and help educate customers on the correct use of chargebacks.
eCommerce technology is constantly evolving. New chargeback threats appear daily. Any successful chargeback management strategy must be flexible enough to identify new trends and techniques, counteract new technology, and adapt to a changing landscape.
No one understands this better than the experts at Chargebacks911®. That’s why we offer the most comprehensive chargeback management services and products available.
Our transparent, end-to-end solutions go beyond prevention. With Chargebacks911 in your corner, you can pivot from defense to offense, and see genuine revenue recovery and future growth.
Whatever you need to fight chargebacks, the solution is just a click away. Contact us today for a free demo.