What is friendly fraud and how to prevent it?

One of the threats merchants face when accepting payment cards is chargebacks. All major card schemes establish chargebacks, so cardholders can reverse unauthorized charges on their accounts and recover stolen funds.

A common chargeback you should be aware of is friendly fraud. The Friendly Fraud Chargeback was established as a consumer protection mechanism to protect customers using credit cards online. However, the chargeback process has created a loophole that allows customers to commit fraud themselves.


So what is friendly fraud? What forms does it take? And how can you prevent chargeback fraud?

What is Friendly Fraud?

Friendly fraud, sometimes called first party fraud or chargeback fraud, occurs when a cardholder makes a purchase and then disputes the charge with their bank. The cardholder can then keep the item or benefit from the purchased service without paying for it.

Friendly fraud covers both malicious fraud and accidental fraud. The challenge is to prove that a consumer acted maliciously to defraud your business. Indeed, “friendly fraudsters” are essentially indistinguishable from regular customers, and chargeback guidelines are stacked in favor of the cardholder requesting a refund from the issuing bank.

Types of Friendly Fraud

There are several types of friendly fraud. Here are the most common.

1. Cyber ​​shoplifting

Sometimes consumers make legitimate purchases with the intent of committing an “item not received” scam. Once the cardholder receives the purchase, they will call their bank and dispute the charge. The author may falsely claim that the purchase was not authorized or that the products or services delivered were defective.

2. Customer confusion

Many customers don’t understand the difference between chargebacks and refunds. Instead of contacting the merchant for a refund, they go directly to their issuing bank and waive the charge, resulting in a chargeback.

Cardholders can also make a purchase and forget. Consumers may dispute charges if they do not recognize a purchase or the billing statement descriptor.

3. Family Fraud

Some consumers share credit cards with family members. Family fraud, also known as shared card fraud, occurs when a household member makes a purchase without the knowledge of the primary cardholder.

Children often steal their parents’ cards and use them to buy in-app video games, for example. Since cardholders have not consented to the purchase, they can contact their bank and tell them that the charge was not authorized.

4. Merchant Error

Sometimes the problem comes from the trader. Instances of merchant error may include a merchant not shipping the order, shipping a broken item, or the product not as described (wrong color, counterfeit, etc.).

Another possible reason could be that a merchant does not cancel a recurring payment as requested. When a cardholder feels like they’ve been cheated or haven’t received what they paid for, they can file a chargeback for that transaction.

5. Fraud by abuse of policy

Customers prefer merchants with a transparent return policy. However, if a merchant has a lax refund policy, it is easy for some shoppers to commit friendly fraud. Companies that allow consumers to return items for no reason and those that don’t limit the number of times a customer can request a refund tend to be more susceptible to friendly fraud.

How to Prevent Friendly Fraud

Whatever the cause, the costs associated with chargebacks can be high for businesses. Here are some steps merchants can take to prevent friendly fraud.

1. Call customers to validate the purchase

If you identify a suspicious transaction, such as an unusually large purchase, initiate a phone call to complete the purchase. For example, if your average transaction is $200 and a customer places an order for $5,000, that warrants investigation.

Call the customer to verify that the purchase is legitimate. Depending on local laws, you can even record the conversation and use it as evidence later if the consumer files a chargeback.

2. Documentary evidence of product delivery

Having tracking and shipping processes in place is a good way to verify that customers are receiving their orders. You can ask the customer to sign for the purchase upon delivery.

A signature certifying that the listed customer received the merchandise may discourage the cardholder from committing chargeback fraud.

3. Provide exceptional customer service

Provide excellent customer service. A helpful and always available customer service team will make consumers feel like their voice is heard.

Make it easy for your customers to contact you by phone, online and on social media. Then, respond promptly and respectfully to inquiries and complaints.

If customers know you’re ready to help, they’re more likely to ask you for help first, not immediately file a chargeback request, or share their experience on consumer complaint sites.

4. Maintain clear policies

A customer may feel that an item or service is not as described or is simply unhappy with the purchase. Instead of contacting the merchant to request a refund, they request a chargeback from the card company.

Providing clear and easy-to-find cancellation and refund policies can guide the customer on where to request a refund. For example, refunds on the Epic Games Store are quick and easy, thanks to their clear and fair refund policies.

Stores that sell physical products often state that refunds are issued once the item is returned and specify the time frame customers have to return their purchases.

5. Black list of repeat offenders

Successful fraudsters are often repeat offenders. One of the best ways to prevent intentional friendly fraud is to block potential fraudsters from making purchases. Keep a list of customers requesting chargebacks and block their purchase attempts.

6. Use an identifiable descriptor

Make sure your business is easily identifiable on bank statements. Customers who see an unrecognizable descriptor on their bank statement will likely dispute the charge.

Ensuring that your company’s brand name matches the legal billing name can help customers identify where the billing is coming from. You can also include the company’s website address to minimize customer confusion.

Protect your business from friendly fraud

The rise of e-commerce and the increase in payment card transactions have led to an upsurge in friendly fraud. Consumers commit friendly fraud for a variety of reasons, claiming they didn’t authorize the transaction, didn’t receive the purchase, the item arrived damaged, and so on.

There are some things merchants can do to prevent friendly fraud. Keeping detailed records, providing exceptional customer service, and blocking repeat offenders are ways to reduce the risk of friendly fraud.

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