Friendly Fraud: Friendly fraud occurs when a customer files a chargeback instead of trying to first get a refund from the merchant. Authorized cardholders dispute legitimate charges to their credit cards, pushing the bank to force a refund under the pretense that the merchant made an error.
Well-intentioned customers may coincidentally perform friendly fraud since they don’t understand the dissimilarity between a traditional return and a bank-issued refund. They imagine a chargeback is simply a different way of getting their money back, as a regular return.
Other consumers intentionally abuse loopholes in the chargeback rules. These cyber shoplifters are maliciously attempting to get something for free, tear you off in the process.
Digital Goods & Services
Digital goods such as music and movie streaming make them particularly susceptible to affable fraud. Let’s take an example of a teenager who buys a movie online using their parents’ credit card without telling them. The parents don’t recognize the transaction and so they dispute it. A lot of friendly fraud in this category is benign, meaning it’s due to cardholder disputing the charge because they simply don’t recognize it. It’s important to clarify that when we say “benign,” we’re referring to the cardholder’s motivation for initiating the dispute.
Gaming & Betting
Online gaming and betting companies have reported some of the highest rates of friendly fraud, reaching 90% or more of their total fraud. And it’s often due to buyer’s remorse. An online gamer might make 200 deposits worth $5 each. When they lose all their bets, that gamer is upset and proceed to dispute all 200 transactions — knowing that they made the $1,000 in bets. Based on the volume of potential chargeback’s alone, gaming and betting companies will take a much more hardline stance and shut down the accounts of such abusive customers. Refund policies can be generous to a point, but when it comes to outright abuse, the only option is shutting down the customer.
The other issue in this sector is similar to the digital goods’ ‘low transaction value’ problem. In many cases, card issuers will elect to absorb the transaction because it’s less than the cost of processing a chargeback. This, again, can exacerbate the problem: online gamers learn how easy it is to dispute charges — and “win” their money back. And just like digital goods merchants, online gaming companies typically also see high rates of false declines.
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With 35% of surveyed businesses in this category stating that friendly fraud made up less than 25% of their chargeback’s, rates may seem low when compared with other industries. However, the high price associated with every disputed ticket purchase that leads to a chargeback makes it a significant financial problem.
Consider this: A plane ticket that initially cost $850 could cost an airline $1,620 after factoring in associated expenses, such as the traveler’s refund, the inability to resell the ticket, nonrefundable airport taxes/fees and chargeback fees. Given the already tight margins in the airline industry and huge costs of chargeback’s, it only makes sense that airlines work hard to prevent purchase disputes.
Opportunity: Reshaping Cardholder Behavior
Each company and industry tries different strategies to reduce friendly fraud. Some gaming companies, for example, have effectively initiated a “one-strike-you’re-out” policy in which they freeze a player’s account after one disputed transaction.
That said, those measures don’t get to the root of the problem: that so many cardholders have learned that they can easily dispute any transaction they don’t recognize or want to pay for. And today’s “zero liability” policies on credit cards means issuers generally give cardholders a refund and initiate a chargeback until the outcome of the disputed transaction is decided — which can take up to four to five weeks.
A significant opportunity exists to improve the current chargeback system while reshaping cardholder’s behavior and fighting friendly fraud. Merchants and issuers can use real-time collaboration to significantly decrease the revenue loss attributed to friendly fraud by reducing or eliminating the need for chargeback altogether. Essentially, such collaboration allows merchants and issuers to deploy the right tools to gather and present information to cardholders upfront. That makes it easier for them to recognize transactions on their card statements — and show the difficulties they would have disputing transactions that were clearly made by them or someone else in their household. This will ultimately prevent cardholders from filing false disputes.
Our team at Chargeback Expertz can tell you how you can save your business from Friendly Frauds. Feel free to contact at our toll-free number +1 (855) 465 4723. We have a team of experts who also assist businesses withChargeback Management and Representment.