Chargeback fraud is an ever-present problem for merchants. An increase in customer disputes is a direct threat to profitability as chargebacks involve extensive fees, penalties, and hidden costs. Considering that most businesses have trouble even identifying friendly fraud, it is little wonder that 90% of merchants report chargeback fraud as a major concern.
The increase in chargeback fraud volume occurred alongside the overall rise in eCommerce. First-party fraud (AKA friendly fraud) costs merchants and issuers over $100 billion a year (PDF), but is often poorly understood. This guide will explain what friendly fraud is, why it’s a problem, and what you can do to counter it. For merchants who operate with tight margins, such increases in dispute volume could have a monumental impact.
Since friendly fraud is one of the most confusing types of chargeback abuse, we want you to have access to the right information. Let’s walk through the details that way you are best prepared to combat this very “unfriendly” form of fraud.
Friendly fraud is a category of chargebacks initiated by an authorized cardholder who unfairly disputes a legitimate payment. Unlike other types of fraud such as stolen credit card details, friendly fraud is caused by a first-party misusing the credit card payment system.
The chargeback process is meant to defend consumers from criminals who make unauthorized transactions, but cardholders – by accident or as an attempt for illegal personal gain – initiate a chargeback for a host of secondary reasons outside of direct fraud.
As a result, purchases made in good faith are repudiated instead of reversed, effectively sidestepping the normal refund process and operating as a form of cyber shoplifting. In fact, 75% of fraud experienced by digital goods’ merchants is estimated to be the result of friendly fraud. Based on this, it is a prevalent abuse of consumer protections, one that leaves merchants on the hook for the financial fallout.
The term friendly fraud comes from the military expression of “friendly fire,” when a soldier fires upon his own side. Likewise, trusted and authorized cardholders can use wrongful disputes and chargeback claims to “fire” at merchants, the very business partners who facilitate a safe payment environment and provide them with needed goods and services.
In 1974, the Fair Billing Act came into law. The legislation defended consumers from unfair credit billing, such as charge errors, undelivered goods, or the fraudulent actions of criminals. Consumers could now dispute incorrect credit card charges on fairness grounds.
The chargeback process is beneficial for the entire card payments industry. A safe business-to-customer relationship inspires repeat business and props up a robust eCommerce market. If trust breaks between either selling or buying party, immense friction is introduced to each business transaction.
Unfortunately, card issuers have consumer-first policies and federal regulation considerations that prioritize customer rights over merchant rights. As a result, financial institutions back the initial claims and reason codes made by consumers by default, regardless of if they are accurate. The burden of proof increasingly becomes the merchant's responsibility.
But fighting the numerous friendly fraud chargebacks is labor-intensive and expensive. And for businesses with tight margins, the resources to defend against disputes are non-existent. As a result, consumers have both the means and the motive to abuse the chargeback process: to wit, some 81% of customers admit to filing a chargeback strictly out of convenience.
Friendly fraud occurs for several different reasons within various purchase scenarios:
First, honest customers may initiate a dispute by accident, without realizing the friendly fraud they caused.
For example, a client might forget their product order and repudiate an unrecognized charge found on their credit card bill. Or, a consumer might initiate a dispute for a delayed package that arrives weeks later, keeping both the reversed cash and the product.
In both cases, the consumer acted honestly and with no ill-intent, yet still committed friendly fraud.
Second, family units can mistakenly engage in friendly fraud chargebacks if the primary cardholder is unaware of purchases made by dependents or relatives.
For example, a child might buy online game tokens for a video game through a saved credit card, a charge that the parent may unknowingly dispute at the end of the billing cycle. Or, a spouse may make a series of unrecognized purchases which the other partner does not recognize, leading to chargeback abuse.
Once again, family fraud is not malicious, but it is an illegitimate chargeback that is considered friendly fraud, which all merchants can challenge.
Third, some customers will lie about a dispute as a way to recoup potential losses.
For example, some clients might feel buyer’s remorse and attempt to steal any paid money back with a chargeback. Others make false claims (hence the term liar buyer) out of convenience, while select groups use chargebacks as a form of political expression and activism.
In the case of liar buyer, the intent is malicious and a direct misuse of a credit card.
Lastly, consumers will use chargebacks to express their dissatisfaction with a product.
For example, a consumer might feel short-changed about the quality of a service. Instead of communicating with the business, the customer attempts to earn recompense through a chargeback.
Often, disputes related to dissatisfaction are closely related to an inaccessible refund policy. Still, if the purchase proceeded according to the pre-set terms and conditions, it is a sale made in good faith, and any related chargebacks are a form of friendly fraud.
You do not have to accept friendly fraud as a cost of doing business. Take the following steps to help reduce your chargeback fraud volume:
Robust and emphatic service reps that can address customer complaints are able to deter and prevent several types of friendly fraud. Reports show that nearly half of friendly fraud is unintentional, with 49% of surveyed consumers filing a dispute because of a misunderstanding. Good customer support can limit such needless chargebacks, all while offering further support to priority users and protecting your chargeback ratio.
A third of surveyed consumers state that they repudiated a charge due to non-delivery. Any actions that better communicate delivery times, shipping issues, and shipment confirmation can reduce transfer-related chargebacks. Collect proof-of-delivery, usage logs, and package receipt signatures as evidence.
Stringent verification systems not only protect both you and the consumer's data, but they help create positive friction that can reduce chargeback volume. Webpages that allow customers to review their order, verify their credit card, and receive online purchase confirmation all help mitigate buyer’s remorse. Plus, any collected payment forms show a clear transaction record that can be used as evidence when fighting a false claim.
Change the descriptors that display on a credit card bill. Consumers rely on credit cards for everyday purchases, and having recognizable business tags can reduce the forgetfulness and confusion that leads to friendly fraud chargebacks. In addition, digital sales have given merchants access to a global audience, which introduces a language barrier. The clearer your billing descriptors are, the better.
About 55% of American consumers reported that a generous returns policy would make them less likely to pursue a chargeback. Moreover, a refund involves far less cost than a chargeback and its associated fees. Invest in a viable returns policy, and write purchase terms and conditions as a form of chargeback fraud protection.
To address friendly fraud, businesses are utilizing various tools and strategies, such as fraud detection software, chargeback management services, and efficient dispute resolution processes. They are also enhancing their customer service and communication to ensure customer satisfaction and reduce the likelihood of chargeback disputes.
Staying vigilant and continuously improving fraud prevention strategies is essential to staying ahead of evolving fraud tactics. There are several strategies and best practices businesses can implement to prevent friendly fraud effectively. Here are some key tips:
Clear communication is crucial in preventing friendly fraud. Ensure customers are well-informed about policies regarding cancellations, returns, and chargebacks. Provide detailed online descriptions and photos of products or services to avoid any confusion.
Make billing descriptors clear and recognizable to customers to prevent disputes over unauthorized charges.
Implement authentication measures to verify customer identity and authorize purchases. This can include verification codes sent to email or phone numbers and multifactor authentication.
Send order confirmation emails with transaction details, including date, time, and amount. These emails help customers recall transactions and identify potential fraudulent activities early on.
Providing excellent customer service reduces the likelihood of charge disputes by ensuring customer satisfaction. Be responsive to inquiries and complaints, and resolve issues promptly.
Utilize fraud detection and fraud prevention tools like fraud scoring, IP address geolocation, and device fingerprinting to identify and prevent fraudulent transactions.
Friendly fraud prevention should be an ongoing process for any merchant. By implementing these strategies and best practices, businesses can reduce the risk of friendly fraud and protect their revenue. While friendly fraud prevention is important, not all chargebacks can be deterred pre-transaction, and oftentimes merchants need to fight friendly fraud post-transaction.
For all the friendly fraud chargebacks you cannot deter pre-transaction, there is the option to fight the false claim through a process known as chargeback representment. If you provide compelling evidence confirming the legitimacy of the transaction, the issuing bank can reverse the chargeback.
Keep the following customer data as compelling evidence:
Transaction data is helpful for transaction verification by providing exact details about when the transaction occurred, which can be crucial for verifying the legitimacy of the transaction. Date and time, for example, helps to match the transaction time with the cardholder’s claim, potentially identifying any discrepancies. It also enables analysis of purchasing patterns to detect anomalies that may indicate fraud.
Credit card verification data ensures that the person making the transaction is authorized to use the card, reducing the chances of fraudulent transactions. These details can be used for chargeback fraud evidence, by demonstrating that proper security measures (like CVV) were followed, which can strengthen the case against a friendly fraud chargeback.
The customer's transaction history is helpful for understanding the cardholder's usual purchasing patterns, helping to spot irregular transactions that may indicate friendly fraud. This data can also show if the cardholder is a regular customer, which can support the argument that the transaction was in fact legitimate.
These communications demonstrate that the business made efforts to resolve any issues directly with the cardholder. Documenting these communications acts as a record that can be used to show that the customer was informed and possibly satisfied with the purchase prior to disputing the charge.
Proof of delivery provides concrete evidence that the goods or services were received by the cardholder. An accepted delivery provides legitimacy of the purchase, supporting the argument that the cardholder accepted the transaction. In addition, a confirmed delivery helps refute claims that the product was never received or that the purchase was truly unauthorized.
Documenting the billing and email address verifies that the transaction is associated with the correct billing address, reducing the risk of chargeback fraud. The email address can be used for sending transaction confirmations and communications, which can serve as evidence in case of a dispute.
Unfortunately, the costs of fighting chargebacks sometimes outweigh the benefits. It can take significant business resources to assemble evidence and refute each repudiated charge, especially for businesses with high sales volume. In such scenarios, outsourced chargeback mitigation is the best and most comprehensive solution to the chargeback problem.
For example, at Justt, we provide complete chargeback lifecycle management. A combination of artificial intelligence and human expertise manages the entire chargeback process, an entirely hands-off service for your business. You receive tailored solutions according to the needs of your business, supported by data insights related to your specific industry. Best of all, enjoy success-based fees. You only pay when we win a dispute, helping mitigate your risk and lower upfront costs.
Chargeback fraud is a major source of loss for merchants. And with the next wave of friendly fraud upon us, such drastic increases in chargeback volume threaten margin-tight industries. However friendly fraud occurs across complex consumer scenarios, making it difficult to evaluate and defend against.
While several helpful actions limit potential instances of friendly fraud (high-quality customer service, good store policies, clear billing descriptors), combating customer disputes can remain a costly endeavor.
For better protection against friendly fraud, chargeback mitigation solutions offer comprehensive tools that help merchants fight false claims and win back lost revenues.
It’s friendly fraud because the customer behaves like a friendly customer up to the moment when they file for a chargeback.
To avoid friendly fraud chargebacks, you need solutions that enable you to address disputes before they become chargebacks. Efficient communication with confused customers can help prevent friendly fraud chargebacks. Improving customer service and communication can ensure that customers are satisfied with their purchases and less likely to dispute charges.
Document every order received properly and submit relevant documentation to the issuing bank as evidence of a legitimate transaction.
Chargeback fraud is when a cardholder intentionally misrepresents the details of a sale to get their bank to reverse a legitimate transaction.
This is a chargeback claim from a customer for an unauthorized purchase that was truly illegitimate and entitles the customer to be made whole.
A bank investigator will inspect transaction data for likely fraud indicators. They can use location data, time stamps, IP addresses, and other data to determine whether the cardholder completed the transaction or not.
Unlike true fraud, friendly fraud isn’t always punishable since most practices leading to friendly fraud aren’t illegal. Even friendly fraud practices of dubious legality are practically speaking difficult to punish through enforcement actions.
Our tailored solution uses superior machine learning technology and human know-how to achieve the best success rates in the industry. Our success-based fee means that you use us risk-free. We can only help your bottom-line.
an experienced product marketing and sales enablement professional at Justt, specializing in chargeback automation. With a background in collaborating across product management, marketing, and sales, Adi excels in driving growth through innovative strategies and tools. Known for a keen eye on market trends and a passion for streamlining operations, Adi leverages extensive expertise to enhance product positioning and customer engagement.
