“Friendly fraud.” Sounds like an oxymoron, right?
Stealing revenue from a struggling business doesn’t sound like something a friend would do. So, what exactly makes this practice “friendly?” In short, the term references the fact that the abuse is coming from someone the seller trusts…usually one of their own customers.
But what is friendly fraud, exactly? How can you fight back without impacting your bottom line? We’ll answer these and many more questions below.
Recommended reading
- Stop Buyer’s Remorse: Tips to Beat the Second-Glance Blues
- What are Refund Services? Are They Professional Scammers?
- Return Fraud: What It Is, and How Merchants Can Fight It
- Is AI Being Abused to Commit Chargeback Fraud?
- Accidental Friendly Fraud: a Fast-Growing Online Threat
- The Top 10 Tips for Chargeback Fraud Prevention in 2024
What is Friendly Fraud?
- Friendly fraud
Friendly fraud also known as chargeback abuse, happens when a customer, either intentionally or inadvertently, files a chargeback against a legitimate transaction instead of seeking a refund directly from the merchant.
[noun]frend • lē • frôd
In a typical friendly fraud situation, a customer contacts their credit card company or bank, claiming that a charge on their account is unauthorized, or that the product or service they bought was not as promised. The problem is that they’re disputing a legitimate purchase. The customer is either deliberately or accidentally misrepresenting the situation.
There are various reasons why customers might resort to friendly fraud. Sometimes, it's because they genuinely don't understand the rules and believe that requesting a chargeback is the only way to resolve a complaint. In other cases, buyers deliberately engage in friendly fraud to take advantage of the chargeback process; they’re trying to get products or services for free.
Friendly fraud is categorized as a form of “first-party” fraud. This means the attack is perpetrated by the authorized account holder (i.e. the customer).
Learn more about first-party fraud
The Impact of Friendly Fraud on Merchants
Friendly fraud can have substantial impacts on businesses, both in terms of finances and day-to-day operations. Let's break down the financial implications of friendly fraud, supported by some statistics and resources:
Revenue Loss
One of the most immediate consequences of friendly fraud is the loss of revenue for merchants. When customers successfully file chargebacks for legitimate transactions, it directly affects a merchant's earnings.
Chargeback Fees
Each chargeback results in a fee imposed by the merchant’s credit card processor. These fees, which can range from $20 to $100 per chargeback, are like fines that merchants have to pay when they can't effectively dispute or prevent chargebacks.
Operational Costs
Chargeback management consumes valuable time and resources. Merchants need to allocate staff to manage chargeback disputes, collect evidence, and communicate with financial institutions. These hidden costs impact overall efficiency and productivity.
Did You Know?
According to Visa, friendly fraud can account for up to 75% of all chargebacks filed by cardholders.
Reputation Damage
Friendly fraud can harm a merchant's reputation. Frequent chargebacks can be seen as an indication of poor service or security vulnerabilities. This can potentially drive away loyal customers and deter new ones from doing business with the company.
Higher Processing Costs
Processors view merchants with a high chargeback rate as riskier, which can lead to increased processing fees. The merchant may be required to work with a high-risk processor if their chargeback rate surpasses acceptable thresholds.
Did You Know?
According to the 2023 Chargeback Field Report, merchants are often afraid to fight back against friendly fraud. Nearly a third of merchants who don’t challenge illegitimate chargebacks cited their reputation as the number-one reason for not engaging in representment.
As you can see, friendly fraud is not just a minor inconvenience for businesses. The financial repercussions can have a significant impact on your bottom line.
Learn more about friendly fraud costs
Accidental vs. Deliberate Friendly Fraud
Like we alluded to above, this phenomenon can be roughly divided into two main categories: accidental and deliberate friendly fraud. Let's explore these categories a little more thoroughly:
Accidental Friendly Fraud
A significant portion of friendly fraud cases are simple misunderstandings. For instance, a customer may have authorized a purchase, but then have difficulty recognizing it on their statement. This often happens when a merchant's billing descriptor differs from their “doing business as” name.
Customers may also initiate chargebacks without realizing that a refund is still an option. They may mistakenly believe that a chargeback is the only way to resolve their issue. Education and clear communication about refund policies can help reduce this type of friendly fraud.
Learn more about accidental friendly fraud
Deliberate Friendly Fraud
In these cases, customers knowingly exploit the chargeback system to their advantage. They may falsely claim that a product was not received, or that a transaction was unauthorized. The intent here is basically to get a refund while keeping a product or service; to “get something for free.” This type of friendly fraud can be orchestrated to commit theft or simply to take advantage of the merchant.
Some customers may even use chargebacks as a means of retaliation against a merchant, or as a way to avoid service cancellation fees. They understand that excessive chargebacks can harm a business, so they use this knowledge to their advantage.
Learn more about chargeback fraud
What is the “Chargeback Spectrum?”
We outlined the distinction between accidental and deliberate chargeback fraud above. However, it’s not always easy to tell which camp a chargeback falls into.
The thing that makes friendly fraud so difficult to manage is that it’s not a black-and-white matter. Chargebacks exist on a spectrum, with blatant merchant mishandling on one end, and deliberate abuse by cardholders on the other. All the terrain in the middle is something of a gray area. This is what we mean when referring to the “chargeback spectrum.”
Understanding where a specific chargeback falls on this spectrum can help merchants determine the appropriate response and improve their fraud prevention strategies.
Learn more about the chargeback spectrum
Acute Causes of Friendly Fraud
A lot of things can trigger friendly fraud; not all cases are malicious in intent. Some can be as simple as not recognizing a merchant’s billing details, and some can stem from simple mistakes. In these cases, the customer may not understand the proper dispute resolution procedure. To illustrate this conundrum, let’s take a peek at a few of he more common friendly fraud triggers:
Buyer’s Remorse
A customer might make a quick, impulsive purchase without fully thinking it through or understanding what they're getting. Later, they regret it, and instead of asking for a regular refund, they file a chargeback to undo the purchase. This could be because they're feeling emotionally distraught, or facing financial stress.
Learn more about buyer’s remorse
Family Fraud
Family members, especially kids or teens, might make purchases using their parents' or guardians' credit cards without permission. When the cardholder finds out about these unauthorized charges, they might assume they’re fraudulent and initiate chargebacks to reverse them. Thus, family fraud chargebacks can happen due to a lack of communication within the family.
Learn more about family fraud chargebacks
Bad Billing Descriptors
Billing descriptor confusion occurs when customers can't recognize a charge on their credit card statement. This could be because the merchant or payment processor used unclear or unfamiliar descriptors. Sometimes, customers genuinely forget about their purchases due to these confusing descriptions.
Learn more about billing descriptors
Refund Services
One of the newest threats facing merchants are ”refund service” scams, in which fraudsters solicit otherwise legitimate consumers as accomplices. The scammer is effectively offering to commit chargeback fraud on the cardholder’s behalf, as a freelance service provider.
Learn more about refund services
Cyber Shoplifting
Cyber shoplifting happens when customers take advantage of online shopping platforms. They make real purchases and then falsely claim they never got the items, effectively using chargebacks to get a refund while keeping the products they bought. This is a premeditated form of chargeback abuse.
Learn more about cyber shoplifting
Experts project that more than three out of four chargebacks are actually cases of friendly fraud.
Friendly Fraud Consequences for Consumers
Merchants bear most of the burden of friendly fraud. With every chargeback filed, the merchant loses the revenue from the original transaction. However, there are certain drawbacks for consumers, too:
Let’s look at things more broadly. When merchants lose revenue due to friendly fraud, they have to raise prices to compensate for their losses. This hurts everyone eventually.
Learn how friendly fraud hurts consumers
How to Prevent Friendly Fraud
Friendly fraud is exceedingly hard to prevent. Unlike criminal schemes like identity theft or account takeover, friendly fraud is a post-transactional threat. The fraud may not occur for months after the purchase in question.
Fraud filters and detection techniques are almost exclusively designed to identify situations where a card is being used suspiciously. They block transactions prior to card authorization. These technologies have no way of knowing if a given transaction will turn out to be friendly fraud later, though. On top of that, the fraudster is the actual cardholder, who may be a long-time, trusted customer.
There are some tactics merchants can adopt to prevent accidental friendly fraud. For example, some card network programs offer automated response programs that can provide additional transaction information in real-time. Plus, if a cardholder has a question about a charge, tools like Order Insight or Consumer Clarity can let sellers resolve the query and avoid a chargeback.
Other basic techniques to lower merchants’ overall risk of fraud, include:
- 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
Learn about chargeback prevention
How to Fight Friendly Fraud
While all of the above steps will help, targeting friendly fraud before it happens is nearly impossible. That doesn’t mean merchants have to be victims, though.
Chargeback representment refers to the process of countering a customer dispute with new evidence. It’s a powerful tool merchants can use to contest illegitimate chargebacks and potentially win a reversal.
Merchants have the right–and the responsibility–to defend themselves against false claims and recover revenue that would otherwise be lost to friendly fraud. As a bonus, doing so regularly will increase the merchant’s reputation with banks, and help educate customers on the correct use of chargebacks.
Learn about representment
The Bottom Line
eCommerce technology is constantly evolving. New chargeback threats appear daily. Any successful chargeback management strategy must be flexible enough to identify new trends and techniques, counteract new technology, and adapt to a changing landscape.
No one understands this better than the experts at Chargebacks911®. That’s why we offer the most comprehensive chargeback management services and products available.
Our transparent, end-to-end solutions go beyond prevention. With Chargebacks911 in your corner, you can pivot from defense to offense, and see genuine revenue recovery and future growth.
Whatever you need to fight chargebacks, the solution is just a click away. Contact us today for a free demo.
