What Is Friendly Fraud and How Can Merchants Prevent It?

For a merchant regularly facing chargebacks, it can become quite frustrating at best and highly costly at worst. Often, merchants don’t fight chargebacks because they feel like it will cost too much and take a good amount of their time. But unless they fight such claims, they can never fully understand how much revenue they are losing to false claims.

These false claims are usually known as friendly fraud. This is not a friendly move, despite what it may sound like. At times, it is done with hostile intentions in an attempt to make money, and at others, it is done without knowing if one’s claim is actually valid. In both cases, merchants on the other side of friendly fraud chargebacks should know what they really are and how they can prevent them from happening.

What is Friendly Fraud?

When a customer buys something with their credit or debit card and later disputes the purchase with their bank without a legitimate reason, it is referred to as friendly fraud. The customer may make up a story about why their claim is legitimate to appear as friendly and honest as possible to their bank. This kind of fraud is also known as chargeback fraud.

So, what is friendly fraud chargeback? It is simply the process of retrieving the money that has been paid to the merchant via one’s card. A customer is entitled to a chargeback only if they have not received their purchased product or service or received something other than what they have ordered. It is always recommended that customers contact the merchant directly first to resolve their problem. However, often they go directly to their bank, which can then lead to friendly fraud chargebacks.

Why does Friendly Fraud happen? 

There are many reasons why friendly fraud takes place, but here are some of the most common ones:

• Dissatisfaction

Sometimes, customers who think that they’ve been wronged by a merchant also ask for chargebacks without asking the merchant to fix the problem. They assume that the merchant has deceived them on purpose and go straight to their bank instead of trying to resolve the matter. This can also happen because the customer isn’t entirely sure of the terms and conditions of their purchase. In such a case, they may be expecting to get something that is not part of their purchase, and, therefore, they feel tricked later on.

• Shoplifting and Theft

If you’ve ever wondered what friendly fraud chargeback is, think of it as a way to shoplift online for fraudsters. Many people abuse the process of asking for a chargeback to get what they want for free. They will buy something to dispute their purchase later because they know that they’ll be able to get their money back quite often. They will lie about the state of the product they received or tell their bank that they never got it. They will also tell their bank that the merchant did not get back to them about their complaint.

By doing so, fraudsters can buy what they like and get their money back. There really isn’t a downside to doing this because usually, the worst that happens to the fraudster is that they don’t get their funds back and they get to keep what they paid for anyway. It is essentially a safer way to shoplift online that doesn’t pose the same risk as shoplifting at a physical store.

• Confusion and/or Family Fraud

Friendly fraud chargebacks are often the result of simple confusion. If someone made a purchase and then forgot about it, or one of their family members used their card to buy something without their knowledge, they can contact their bank to dispute the charge when they see it on their statement. This latter situation is also known as family fraud. It is usually easy to resolve these issues directly with the merchant, but it is still considered friendly fraud if it leads to a chargeback for the merchant.

Friendly Fraud vs Chargeback Fraud

Chargeback fraud refers to situations where the cardholder’s payment information has been stolen and used without their knowledge, resulting in unauthorized purchases. On the other hand, friendly fraud occurs when a cardholder initiates an illegitimate chargeback, committing fraud against the merchant.

When a cardholder falls victim to chargeback fraud, their primary recourse is to file for a chargeback. This is the fundamental purpose of chargebacks: to protect cardholders from unauthorized transactions. Merchants are advised to accept chargebacks that they believe to be genuine cases of chargeback fraud, as successfully contesting such chargebacks is challenging.

Conversely, in instances of friendly fraud chargebacks, it is the banks, card networks, and ultimately the merchants who become the victims, with the merchant bearing the associated costs. Whether intentional or unintentional, chargeback fraud poses significant issues for merchants.

Accidental Chargeback Abuse

Accidental friendly fraud can occur due to unintentional actions, ignorance, or honest mistakes. The cardholder may become confused or misunderstand a charge listed on their monthly statement.

One common form of friendly fraud chargebacks is family fraud. This occurs when a relative of the cardholder, such as a child, gains access to the cardholder’s payment information and makes a purchase without their knowledge.

Here are several other scenarios that can lead to unintended friendly fraud chargebacks:

• The cardholder does not recognize the billing descriptor used by the merchant.
• The cardholder forgets about a recurring payment.
• The cardholder requests a refund, but the process takes longer than expected.
• The cardholder lacks understanding about the distinction between chargebacks and refunds.
• The cardholder simply forgets about the purchase.
• The cardholder inquires about a charge, and the bank initiates a dispute on their behalf.

In these situations, cardholders do not harbor malicious intentions. Although they may believe a chargeback is warranted, their primary objective is to obtain a refund. They did not intend to harm the business involved in the chargeback.

Intentional Chargeback Abuse

On the flip side, there are consumers who deliberately exploit chargebacks for personal gain. These individuals are well aware of how the system operates and manipulate it to their advantage.

One prominent example is the practice commonly referred to as “cyber shoplifting.” This occurs when cardholders intentionally make purchases with the intention of later filing chargebacks. It is a form of theft, plain and simple. It is akin to walking out of a physical store with items without making any payment. In both cases, the perpetrator aims to acquire something without paying for it.

However, chargeback fraud encompasses more than just this blatant form. Cardholders may initiate fraudulent chargebacks for various reasons, including:

• Buyer’s Remorse: The buyer regrets a purchase but prefers not to approach the merchant for a refund.
• Exceeding the Return Period: The buyer intended to return an item but missed the refund window.
• Convenience: The buyer perceives requesting a refund as too much hassle and believes a chargeback will be quicker.

In these cases, the individuals filing the chargebacks are seeking personal convenience or monetary gain, even though their actions involve dishonesty and misuse of the chargeback system.

Friendly Fraud Consequences

First of all, it is important to know that friendly fraud chargebacks are very common. Merchants report that they make up for around 1/3 of all the chargebacks they face. Banks, on the other hand, generally report much lower numbers. One reason is that cardholders are often able to convince their banks that their claim is legitimate, and the banks don’t care to ask the merchant about the issue.

Consequences for Merchants

Friendly fraud chargeback can cost a merchant more than double the transaction amount in terms of the losses they face. Not only that, but it also leads to an increase in the merchant’s chargeback ratio. This can then add up and bring about even more consequences, including the termination of their account as a merchant. So, there are plenty of additional costs that a merchant must bear because of careless and/or hostile claims from customers.

Consequences for Consumers

While merchants primarily bear the brunt of friendly fraud, there are also drawbacks for consumers to consider:

• Lengthy Process: Chargebacks generally take significantly longer to process than refunds, resulting in delays for cardholders seeking resolution.
• Credibility Concerns: Cardholders who frequently abuse chargebacks may find it challenging to receive assistance in genuine fraud cases. Their credibility may be questioned due to a history of false claims.
• Potential Penalties: If caught engaging in fraudulent activities, the cardholder may face penalties, including the possibility of losing banking privileges. Such penalties can have adverse effects on their financial standing, including their credit score.

Taking a broader perspective, the repercussions of friendly fraud extend beyond individual consumers. When merchants experience revenue losses due to friendly fraud, they are compelled to increase prices to offset their losses. Ultimately, this impacts everyone, leading to higher costs for goods and services, which negatively affects all consumers.

How to Prevent Friendly Fraud?

It’s not easy to prevent these claims completely, but merchants can take certain steps to minimize the number of chargebacks.

• If you’re facing too many malicious chargebacks, it is important to start making a blacklist of customers who are abusing the system. This can help you prevent repeat offenses from the same customers.
• To reduce the number of complaints that arise due to confusion, make sure to have a good customer service team at work. If you make it easy and simple for customers to get in touch with you via email or a phone call, they will be more likely to contact you and get the clarification they need instead of assuming you’ve tricked them.
• Ensuring customer satisfaction is also vital to stop people from making false claims because they are not happy with their service. Keep them happy and offer a reasonable refund policy, so they get in touch with you before going to their bank.

You can also fight false claims by making sure that you maintain all the documentation related to each order. This will help you submit the relevant information to the bank, which serves as evidence in your favor. If you keep everything on your side sorted, you can win a false chargeback case and prevent lost revenue. Services like Chargebackhit can do all the work for you in this regard and help you prevent and resolve fraudulent chargebacks with ease.

How to Deal with Friendly Fraud

To help merchants reduce the number of chargebacks they face and also fight illegal ones, Chargebackhit offers a vast array of services. The website is designed to let you quickly and easily calculate just how much these claims are costing your business to get a clearer view of the money you can save. This can show you how much money you are losing on a regular basis and help you decide if you need the service to get all that money back.

Not only does Chargebackhit help you prevent these claims by sharing enhanced transaction information, but it also aids in resolving these disputes. On top of that, merchants can also recover their revenue as Chargebackhit helps them build a solid response with all the relevant evidence needed to win such cases. This takes away much of the burden off of your shoulders as a merchant, which is one of the reasons merchants don’t try to fight such claims in the first place. The service is designed to make the process easy for its customers and ensures the mitigation of issues such as excessive loss of revenue, limited business scaling, and increased acquiring fees that the business faces when it is considered more “high-risk.”

Conclusion

Friendly fraud is a real threat that you must always be aware of. It is becoming easier and easier for people to file such complaints directly from their bank’s phone app without having to take any difficult steps that may deter them from contacting the merchant first. As a merchant, all you can do is provide the best possible service to each customer and document each step of their purchases so that you can fight false claims. To take back control over your finances and make sure that you are not losing your hard-earned money to false claims, you can also take help from Chargebackhit and you won’t have to worry too much about friendly fraud anymore.