Introduction to Friendly Fraud

Friendly fraud occurs when a customer makes a legitimate purchase but later disputes the transaction with their bank to get a refund. This type of fraud costs businesses millions in lost revenue and chargeback fees. While not all disputes are malicious, friendly fraud is growing, especially in ecommerce.

Why Friendly Fraud is a Problem

Friendly fraud impacts business operations in several ways:

  • Revenue loss: Businesses lose both the sale and the product, as customers don’t return goods in most cases.
  • Chargeback fees: Beyond lost revenue, merchants must pay chargeback fees, which range from $20 to $100.
  • Operational costs: Disputing chargebacks takes time and resources, and many businesses lack the tools to gather proper evidence.

The rise of online shopping has accelerated friendly fraud. Studies show a significant increase in friendly fraud over the past few years. In addition, the COVID-19 pandemic made consumers more aware of chargebacks, further increasing fraud cases.

Common Causes of Friendly Fraud

  1. Accidental Disputes: Customers sometimes forget about legitimate purchases, especially recurring charges like subscriptions. They may not recognize a charge and file a dispute.
  2. Dissatisfaction: When a product doesn’t meet expectations, some customers bypass return policies and dispute the charge directly with their bank.
  3. Family Fraud: Often, one family member makes a purchase, and another disputes the charge, thinking it was unauthorized.
  4. Refund Abuse: Some customers exploit refund policies, requesting chargebacks instead of following a return process.

How to Prevent Friendly Fraud

Fighting friendly fraud requires a combination of prevention strategies and better customer engagement.

1. Clear Communication

Make sure your customers understand your policies and processes:

  • Billing clarity: Use clear and recognizable descriptors on customer bank statements. Confusing descriptors often lead to unnecessary disputes.
  • Return policy: Offer easy-to-understand return policies. Post them visibly on your website and make sure customers know how to return products instead of disputing charges.
  • Responsive customer service: Encourage customers to contact you directly if they have issues with their order. A quick response can prevent chargebacks.

2. Fraud Detection Tools

Utilize available technology to identify and stop potential fraud early on:

  • Authentication tools: Use verification systems like Address Verification Service (AVS), card security codes (CVV), and 3D Secure to verify customer identity.
  • Digital footprinting: Track digital information such as IP addresses, email, and device fingerprints to identify suspicious patterns.
  • Chargeback protection services: Merchanto.org offers services that help merchants detect and dispute friendly fraud by providing real-time data on customer behavior and transaction history.

3. Chargeback Management

Disputing chargebacks successfully requires good record-keeping and quick responses:

  • Keep transaction records: Maintain clear records of purchases, including customer information and communication. Evidence such as delivery confirmations, signed receipts, and customer correspondence is key when disputing a chargeback.
  • Mastercard and Visa rules: Take advantage of new rules allowing merchants to present more evidence of a valid transaction.
  • Pre-dispute collaboration: Mastercard now requires issuers to collaborate with merchants before filing a chargeback. Merchants have 72 hours to respond and resolve the issue before it escalates.

4. Easy Returns and Refunds

Simplify the return process to prevent disputes:

  • Speedy refunds: Offer quick refunds for returns, reducing the likelihood that customers will file a chargeback.
  • Returnless refunds: For low-cost items, offer returnless refunds where it makes sense. This avoids unnecessary disputes and customer frustration.

How to Fight Friendly Fraud Chargebacks

Disputing a friendly fraud chargeback requires strong evidence. Here’s how to approach the process:

  • Gather evidence: Save receipts, shipping confirmations, and digital footprints. Use customer correspondence to show efforts to resolve issues before the chargeback was filed.
  • Communicate with the customer: Often, customers file chargebacks out of frustration. Reach out to them directly to address concerns and offer solutions. Many disputes can be resolved before escalating into formal chargebacks.
  • Present your case: When fighting a chargeback, present all relevant documents clearly and concisely. Evidence such as proof of delivery, communication records, and purchase details are crucial.

Case Studies and Real-World Examples

  • Subscription Services: Subscription businesses often face accidental chargebacks when customers forget about renewal payments. Clear reminders and easy cancellation processes can help reduce disputes.
  • In-App Purchases: Gaming companies deal with family fraud, where children make unauthorized in-app purchases. By implementing better parental controls and easy refund options, some businesses have managed to lower friendly fraud rates.

Conclusion

Friendly fraud is a growing threat, especially for online businesses. However, with a combination of fraud detection tools, clear communication, and effective dispute management, businesses can mitigate its impact. By staying proactive, you can reduce chargebacks, protect revenue, and build better relationships with customers.

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Chargeback Management,