“Friendly fraud.” Sounds like an open and shut case, right?
Looting money from a surviving business doesn’t sound like something a close one would do. So, what completely makes this process “friendly?” In short, the term hints at the truth that mistreatment is enforced from someone the seller has faith in…usually one of their close customers.
In this blog, we’ll speak about what friendly fraud is and describe why it has been such a major factor of loss for merchants. We’ll also tell how it works, and major tips sellers can adopt to safeguard their money from unwell claims.
What Are Chargebacks?
Friendly fraud takes place when cardholders abuse the credit card chargeback system. So, it will assist if we take a fast look at how chargebacks were made to work before jumping into how they’re misused.
The chargeback system was at first conceived as a consumer safeguard in opposition to credit card fraud. It provides cardholders the right to dispute what they feel are biased or invalid charges. Chargebacks can only be classified for unquestionable legal reasons. For example, if:
- The item or service is not delivered.
- The item or service was not as described before the sale (not genuine, wrong color, etc.).
- The merchant didn’t cancel a recurring payment when it was requested.
- The original transaction was not official.
The bank will go through the claim. If the consumer’s claim is legally correct, the payment will be bounced back. This also assures cardholders won’t get stay with a huge debt if their card is lost or stolen and used to make unofficial purchases.
The process still goes well…at least when it’s utilized as intended. It was put into perfect place half a century ago, though; long before the innovation of the internet.
The way we buy has changed, but the chargeback system is still the same. That truth has opened the door to new trouble like friendly fraud.
What is Friendly Fraud?
Friendly fraud initiates when a customer accidentally or purposely files a chargeback on a legal transaction, a part of trying to first get a refund from the merchant.
Ecommerce extended too fast for the payments industry to answer back. This showed loopholes in the whole process. More and more consumers are utilizing loopholes in the chargeback process, for example, eliminating merchants and going straight away to the bank for a refund.
In short: Any time a cardholder asks for a chargeback without a perfect reason to do so, that customer is performing friendly fraud.
Why friendly fraud isn’t declared criminal activity?
“Fraud” is a pretty translucent idea. Commonly, when we talk about criminal fraud, we’re talking about a particular criminal act, like stealing someone’s identity to defraud another party. Many of the things associated with friendly fraud are not illegal; in certain cases, the cardholder is not aware of what they’re doing.
How Friendly Fraud Takes Place?
Banks are expected to investigate every cardholder claim previously commencing a chargeback. At times, this manages to reveal cardholders for abusing the chargeback process.
But, let’s say a buyer connects the bank, claiming that the item which he got is not as it was explained before purchase. That’s somewhat subjective, making it tough to disprove. A dispute can easily become a topic of one party’s matter against another’s. Banks always want to keep their customers satisfied and happy, so they have a motive to take the customer’s side.
This makes a feedback curve. Once cardholders find out how quick, easy and profitable it can be to request chargebacks, they can be lured to do it again. That’s why, according to the data collected, 40% of cardholders who do friendly fraud will do it again within 60 days, and it’s this basic nomenclature
Why does friendly fraud happen? There are a lot of potential reasons
We can divide friendly fraud into 2 major groupings: Accidental chargeback abuse, and deliberate chargeback fraud.
Accidental Chargeback Abuse
Friendly fraud may take place without any intention via ignorance, or by a genuine mistake. The cardholder may be in a delusion or might be confused about a charge on their monthly statement.
Family fraud, for example, there is a general origin of friendly fraud chargebacks. This occurs when a relative of the cardholder, like a child, the wife has allowance to use the card itself and knowledge regarding to the cardholder’s payment information and purchases without their consciousness.
There is some other picture that can lead to accidental friendly fraud chargebacks:
- The cardholder doesn’t acknowledge the merchant’s billing descriptor.
- The cardholder neglects a recurring payment.
- The cardholder requested a refund, but it forgot to do it on time.
- The cardholder doesn’t know what is chargebacks and refunds.
- The cardholder simply forgot about the purchase he made.
- The cardholder was interrogated about a charge, and the bank initiated a dispute on their behalf.
Cardholders in these situations are not being venomous. While they may swallow a chargeback as justified, their primary motive was to claim their refund. They did not mean to hurt the business on the other end of the chargeback.
Intentional Chargeback Abuse
On the other hand, we have consumers who intentionally chargebacks for personal greed. These fraudsters know how the system works, and they use it for their profit.
The most obvious example is a practice known as “cyber shoplifting.” This takes place when cardholders buy goods with the pure intention of filing a chargeback later. It’s robbery, pure and simple. It’s not dissimilar to taking items from a physical store without paying. In either case, the bandit is trying to get something for nothing.
That’s not the only case that comes under the chargeback fraud envelope. Cardholders might file fraudulent chargebacks due to:
Friendly Fraud Consequences for Merchants
With every chargeback filed, the merchant drops the revenue from the main transaction. Unlike a refund, however, there are many losses to consider:
- The cardholder keeps any sort of merchandise shipped
- The merchant should pay an additional chargeback fee
- Overhead costs like shipping and handling will be a loss in the pocket.
- Transaction processing fees go to waste
- Fighting invalid charges drain out additional time and money
Data from LexisNexis shows that the approximate merchant lost a total of $3.60 in revenue for every $1 in main transaction value. That’s not even accounting for longer-term hazards, like possible loss of processing capabilities if the merchant’s chargeback ratio extends acceptable limits.
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Are some chargebacks just a “cost of doing business?”
No. While merchants may have to bargain with the occasional fraud chargeback, almost every friendly fraud chargeback can either be challenged or neglected through effective chargeback management.
Friendly Fraud Consequences for Consumers
Merchants hold up most of the burden of friendly fraud. However, there are a few drawbacks for consumers, too:
- Chargebacks generally take much longer than refunds.
- Cardholders who “fabricate lies” too common may not get help in genuine fraud cases.
- The cardholder may be punished if caught; up to and including loss of banking privileges.
- Loss of banking privileges can affect the cardholder’s credit score.
Let’s look at things more widely. When merchants lose income due to friendly fraud, they have to increase prices to repay their losses. This damages everyone eventually.
How to Prevent Friendly Fraud
Let’s get this clear up front: friendly fraud is extremely hard to prevent.
Unlike criminal dealings like identity theft or account takeover, friendly fraud is an undertaking danger. The fraud may not happen for months after the purchase in question.
Fraud filters and observation techniques are almost simply designed to recognize situations where a card is being used problematically. They choke transactions before card authorization. These technologies have no chance to know if a given transaction will turn out to be friendly fraud later, though. On top of that, the bluffer is the actual cardholder, who may be a trusted customer for a long time.
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There are some plans merchants can choose to prevent accidental friendly fraud. For example, some card network programs provide automated response programs that can give additional transaction information in real-time. If a cardholder doubts a charge, tools like Order Insight or Consumer Clarity can let sellers sort out the query and avoid a chargeback.
There are additional basic techniques that merchants should adopt to lower their overall risk of fraud, including:
- Regular communication with customers
- Easily recognizable billing descriptors
- Subscriber notices sent before charging for recurring payments
- Tracking and signed delivery confirmation on larger orders
- Granting refunds and cancellations as soon as requested
How to Fight Friendly Fraud
While all of the stated steps will help, pointing to friendly fraud before it occurs is next to possible. That doesn’t mean merchants have to be sufferers, though.
Chargeback presentment describes the process of countering a customer dispute with fresh evidence. It’s a heavy tool merchant can use to contest unlawful chargebacks and potentially win a reversal.
Merchants have the right–and the commitment –to protect themselves against wrong claims and recover revenue that would otherwise be lost to friendly fraud. In addition, doing so continuously will boost the merchant’s reputation with banks, and help inform customers on the correct use of chargebacks.
The Bottom Line
E-Commerce technology is continuously evolving. New chargeback threats pop up daily. Any flourishing chargeback management master plan must be flexible enough to recognize new trends and techniques, counteract new technology, and take shape to a changing landscape.
No one gets to know this better than the experts at Chargeback Expertz. That’s why we offer the most complete chargeback management services and products available.
Our transparent, end-to-end solutions go far away from prevention. With Chargeback Expertzin your corner, you can pivot from defense to offense, and see true revenue recovery and future growth.
Whatever you need to fight chargebacks, the solution is just a click away. Contact us today on +1 855-465-4723