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Friendly fraud, a type of chargeback fraud, is one of the contributing factors to the more than $32b worth of annual payment card fraud throughout the world. Chargebacks are challenging for all businesses that accept credit card payments. Whether it’s a Fortune 500 company or a local enterprise, chargebacks can result in various payment problems for a business.
Chargebacks occur when a cardholder disputes a charge on their credit card. One of the leading causes of chargebacks is referred to as “friendly fraud.” So, what is friendly fraud, and how can it impact your business?
This blog explores friendly fraud, what causes it, and how you can protect yourself from this type of chargeback. Let’s get started!
What Is Friendly Fraud?
Friendly fraud, or first-party fraud, occurs when a cardholder disputes a legitimate charge on their credit card. This can be due to a variety of accidental and intentional reasons.
Regardless, friendly fraud costs businesses billions of dollars each year, and it can be difficult to prove that the cardholder made the charge unless you have various controls in place. Friendly fraud is lucrative for consumers – it can result in a full refund for a product or service they have received.
Below is an example of friendly fraud:
An individual orders a pair of sneakers online. The sneakers arrive after three days, but a week after the initial charge, the cardholder files a chargeback with their card issuer, claiming to have never received the package. If the cardholder successfully claims the package never arrived (the company cannot prove otherwise), then the cardholder will receive a full refund for a product they now own.
How to Identify Friendly Fraud
It can be difficult to identify friendly fraud. However, there are a few signs that a chargeback might be friendly fraud:
- The customer is claiming that they never received an item
- A customer is claiming they returned an item but did not receive a refund
- The customer claims they don’t remember a specific purchase
- The customer disputes the chargeback many days or weeks after the transaction
Friendly fraud chargebacks typically happen later than traditional fraud chargebacks, as cardholders are more likely to immediately flag true fraud on their cards.
If you are taking measures to protect yourself from chargebacks, such as payment verification systems, signed delivery, and other measures, you can use these tools to verify if your business is the victim of friendly fraud.
Friendly Fraud vs. Chargeback Fraud vs. Merchant Error
As discussed, friendly fraud is the process of disputing a charge after receiving goods or services, whether it’s by mistake or intentionally. Friendly fraud is a form of chargeback fraud, and the two terms are often used interchangeably.
Lastly, merchant error is different. It can lead to legitimate chargebacks. The following merchant errors can result in chargebacks from customers:
- The merchant does not deliver a product or service
- The merchant does not honor its return policies
- A merchant charges a customer incorrectly (i.e., the incorrect amount)
- A merchant sells products or services that do not fit the description (false advertising)
Knowing the difference between friendly fraud, general chargeback fraud, and merchant error can help detect fraud and ensure you approach chargeback disputes correctly.
What Is Family Fraud?
Family fraud is a type of friendly fraud that occurs when a cardholder’s family member uses their card to make a purchase without their knowledge. As the cardholder is unaware of the purchase, they may dispute the charge when they find it on their credit card statement.
What Causes Friendly Fraud?
Friendly fraud chargebacks can be both intentional and accidental. Let’s explore the various causes of friendly fraud in more detail below:
Accidental chargebacks
While all types of friendly fraud cause trouble for merchants, there’s no doubt that it can happen accidentally. For example, if you use a different name than your trading name on your card transactions, a customer may not recognize your other name on their credit card statement. This can lead to accidental credit card fraud.
Intentional chargebacks
However, not all chargebacks are accidental fraud. Let’s look at some examples of intentional chargebacks:
Convenience
It’s painful to say, but some chargebacks are down to pure convenience. If a customer cannot be bothered to return a product, they may issue a dispute instead.
Buyer’s remorse
Additionally, friendly fraud can happen because buyers no longer want an item they purchased. They may file a chargeback if they cannot return the item because of your return policy.
Waiting too long
If a product takes too long to arrive, a customer may file a chargeback. This is why it’s essential to use reliable delivery partners – shipment tracking can help avoid this problem.
Scam
Unfortunately, friendly fraud can also be an outright scam. There are some instances in which a cardholder will intentionally dispute a charge because they don’t believe they will be caught.
Friendly Fraud Consequences
Friendly fraud has consequences for all parties involved. Let’s take a look at how it impacts merchants and consumers:
For merchants
Friendly fraud is a nightmare for merchants. It can result in serious costs, as you will need to refund money if you are unable to successfully dispute a chargeback. Also, even if you are successful at disputing a chargeback, the dispute process takes resources – and your merchant account provider may still charge a fee.
Lastly, too many chargebacks can affect your chargeback rate, putting your merchant account at risk. Merchant service providers and card networks may deem you as high-risk, which can result in higher processing costs or the complete loss of your merchant account.
For consumers
For consumers, friendly fraud causes a variety of problems. Firstly, this type of fraud contributes to merchant costs, which results in higher consumer prices. Also, friendly fraud makes merchants dubious about genuine chargebacks, which means that consumers may have legitimate chargebacks contested.
Also, if you are the perpetrator of friendly fraud, you may face criminal charges that result in jail time or hefty fines.
Can you go to jail for friendly fraud?
Yes. Individuals who commit friendly fraud or chargeback fraud can face fraud charges in many states throughout the USA. There are both monetary and prison penalties that may be enforced for this type of fraud.[1]Bachner & Associates, PC. “Are there consequences for filing false chargebacks?” Accessed June 22, 2022.
Preventing Friendly Fraud
There are many ways to prevent friendly fraud from impacting your business’s finances. Let’s take a look at some of the top prevention methods below:
Use your trading name for all accounts
One of the biggest mistakes that businesses make is to use a different name than their trading name for their merchant accounts. For example, some businesses may use a parent company name rather than the direct trading company name.
This can create genuine confusion for customers, who many look at a credit card statement and believe an unfamiliar company is charging their card. By making sure your name is recognizable on credit card statements. You can prevent accidental chargebacks!
Use authorization holds
Another useful tool for fighting chargebacks is an authorization hold. With an authorization hold, your credit card processor verifies a customer has available funds for purchase without finalizing the purchase. If a customer files a chargeback against an authorization hold, you can reverse the charge without incurring any chargeback ramifications.
Use payment verification processes
Next, make sure to use payment verification processes when you accept credit cards. There are many verification tools that can send confirmation texts, emails, and more. In using these tools, you can prove that the cardholder made the purchase, which can prevent friendly fraud.
Use signature delivery
If you want to avoid customers claiming they never received a delivery, signature shipping is a must. This will confirm that an individual receives your shipment, leaving less room for friendly fraud.
Clearly outline refund and shipping policies
If you have clear, easy-to-find refund and shipping policies, you can avoid confusion that may lead to a chargeback. If you don’t tell people how long they have to return an item, it may anger them if you refuse a refund. Stating all your terms and conditions can prevent unnecessary chargebacks.
Keep track of repeat offenders
Unfortunately, if someone is conducting friendly fraud on purpose, there’s a good chance they will make a habit of it. Make sure to develop a database so you can keep track of customers that make multiple chargeback claims.
Why do businesses hesitate to flag friendly fraud?
Flagging friendly fraud seems like a logical decision, but there are a couple of reasons that businesses hesitate to do so:
| Resources | Reputation |
| Unfortunately, combatting friendly fraud can sometimes take up significant resources. Gathering evidence and disputing charges without the guarantee of success can be taxing for a business, especially if the amount is small. | It can be difficult to know if a customer is committing friendly fraud, which means that you risk disputing a genuinely fraudulent charge. This could damage your reputation with a customer if their chargeback is genuine. |
How to Fight Friendly Fraud
If you do decide to dispute a chargeback, you need to approach the process correctly. Let’s take a look at the steps to take if you need to fight friendly fraud.
Your acquirer will let you know that a chargeback has been raised against a charge. They will also provide you with a deadline to dispute this chargeback.
- Collect details about the transaction, such as customer details, item details, transaction date, etc.
- Contact your acquiring bank to lodge a dispute – and make sure to do this within the deadline set by the acquirer
- Submit your evidence – such as signed shipping documents, card verification evidence, etc. – and write a detailed but concise report on why you believe the chargeback is invalid.
While protecting yourself from chargebacks can take time, it can deter people from filing fraudulent chargebacks in the future.
Friendly Fraud: Final Thoughts
Now that you understand friendly fraud, its risks, and how to prevent it, start developing your own strategy. If you don’t currently use the chargeback prevention methods outlined in this guide, it’s time to upgrade your policies. Invest in verification systems, use your trading name for your business accounts, keep track of repeat offenders, and utilize the other tips on this page.
Whether you’re a new business owner or a veteran in your industry, managing chargebacks is essential. Don’t waste another day being vulnerable to friendly fraud!
