Have you ever heard of "friendly fraud"? It might sound strange since the word "friendly" suggests being nice and helpful, but in this case, it's not so friendly at all.
Friendly fraud happens when someone steals money from a struggling business. What makes it "friendly" is that the thief is usually someone the business trusts, like one of their own customers.
In this post, we'll explain what friendly fraud is and why it causes a lot of loss for merchants. We'll also show how it works and share some tips for sellers to protect their income from false claims.
Let's start with the basics: What exactly are chargebacks?
Friendly fraud occurs when people misuse the credit card chargeback system. To understand how this happens, let's first learn what chargebacks were meant for.
The chargeback system was created to protect consumers from credit card fraud. It allows cardholders to dispute charges that they believe are unfair or incorrect. Chargebacks can only be used for valid reasons, such as:
- Not receiving the item or service they paid for.
- Receiving an item or service that doesn't match the description (like receiving a fake or wrong product).
- The merchant not canceling a recurring payment when asked to.
- The original transaction not being authorized by the cardholder.
When someone files a chargeback, the bank investigates the claim. If the cardholder's claim is valid, the payment is reversed, ensuring they don't have to pay for unauthorized purchases made if their card gets lost or stolen.
What is Friendly Fraud?
The rapid growth of eCommerce revealed flaws in the payment system, leading some customers to exploit these flaws by going straight to the bank for refunds, bypassing the merchant.
In simple terms, if a customer asks for a chargeback without a good reason, it's considered friendly fraud.
Fraud is a broad term, and criminal fraud involves specific illegal acts, like stealing someone's identity to deceive others. Many actions related to friendly fraud may not be illegal, and often, the customer may not even know they are engaging in fraud.
How Does Friendly Fraud Happen?
Banks are supposed to investigate each claim before granting a chargeback, which can help catch people abusing the process.
However, some disputes are not so clear cut. A customer orders a product, doesn't arrive exactly how they expect, did not read the refund policy, and disputes the charge with the bank. Winning these chargebacks as a merchant are tough - the banks are incentivized to side with their customers, the consumer, in order to keep the card holders happy.
This creates a cycle where some customers realize how easy it is to get chargebacks and may do it again. In fact, around 40% of customers who commit friendly fraud repeat the behavior within two months.
Let's understand friendly fraud better by looking at two main types: accidental chargeback abuse and deliberate chargeback fraud.
Accidental Chargeback Abuse: Friendly fraud can happen without any intention to deceive. It occurs when cardholders make mistakes or are unaware of a charge on their credit card statement.
For example, family fraud is a type of friendly fraud where a family member, like a child, uses the cardholder's payment information to make a purchase without them knowing.
Here are some other situations that can lead to accidental friendly fraud chargebacks:
- The cardholder doesn't recognize the name of the merchant on the bill.
- The cardholder forgets about a recurring payment.
- The cardholder asked for a refund but didn't receive it in time.
- The cardholder doesn't understand the difference between chargebacks and refunds.
- The cardholder simply forgets about a purchase.
- The cardholder contacts the bank about a charge, and the bank initiates a dispute on their behalf.
In these cases, the cardholders aren't trying to harm the business; they believe that a chargeback is the right way to get their money back for a mistaken or forgotten transaction.
Intentional Chargeback Abuse: Now, there's another type called "Intentional Chargeback Abuse," where some people misuse chargebacks on purpose to benefit themselves. These fraudsters are familiar with how the system operates, and they take advantage of it.
The most obvious example is what we call "cyber shoplifting." Here's how it works: these individuals buy items using their credit cards, but with the plan to ask for a chargeback later. Essentially, they're stealing because they want to get away without paying for the things they got, just like taking items from a physical store without paying.
Can I Effectively Counteract Chargeback Fraud?
Absolutely, and here's how.
It's a common issue that many cardholders are inadvertently engaging in fraud by initiating chargebacks as a means to avoid payment for products and services. Often, the distinction between returns and chargebacks remains unclear from the cardholder's viewpoint. Interestingly, there are instances where financial institutions may initiate disputes without the customer's explicit awareness.
Such misunderstandings constitute a significant portion of chargebacks and are not necessarily indicative of malicious intent. The encouraging aspect is that numerous chargebacks stemming from these scenarios can be curtailed through straightforward adjustments to policies and operational protocols. Here are our recommendations:
Enhance the Customer Experience: Our analysis has unveiled over 100 minor lapses in customer service, user experience, policies, and logistics that may trigger chargebacks without offering any anti-fraud advantages. The elimination of these shortcomings can substantially reduce chargeback occurrences.
Implement Blacklists and Fraud Scoring: Effectively identifying unscrupulous actors can act as a deterrent against repeat offenses. Additionally, the incorporation of fraud scoring tools enables accurate assessments of potentially fraudulent transactions, resulting in better decision-making and fewer erroneous rejections.
Leverage Anti-fraud Measures: Employ advanced payment tools such as CVV verification, AVS, geolocation, and 3-D Secure 2.0. By doing so, you not only thwart criminal fraud attempts but also foster trust among legitimate buyers.
Embrace Secure Technologies: Emphasize the utilization of secure technologies like Apple Pay and its two-factor security. Encouraging the adoption of these alternative payment methods enhances the security of card-not-present transactions, making them more dependable.
To effectively combat chargeback fraud, a comprehensive strategy is essential. It involves both preemptively preventing chargebacks wherever feasible and mounting a vigorous defense in suitable cases.
