Last editedOct 20213 min read
When banks provide a refund due to a customer raising a dispute, this occasionally qualifies as friendly fraud. So, what is friendly fraud, and how can fraud ever be friendly? Learn more about how friendly fraud happens below, as well as a few tips to protect your business from chargebacks.
What is friendly fraud?
If a customer disputes legitimate charges to their credit card, they’ll receive a refund from the bank. This is because the bank will treat the chargeback as fraud, despite the transaction being legitimate. Because the bank believes that actual fraud has taken place, they’ll refund the customer whether or not this behaviour is proven to be fraudulent.
So, how does a friendly fraud chargeback differ from everyday fraud? Normally, a fraudster will use a stolen credit card or online payment details to make a purchase in the victim’s name. With friendly fraud, it’s the cardholder who is disputing their own purchase. It could also be the cardholder’s family member or other unauthorised member of the same household. The transaction itself is legitimate, but the customer wants to reverse it with a chargeback.
This can cause sticky situations for merchants, who must shoulder the cost of these chargebacks. Banks often provide a refund without further investigation, making it easy for customers to commit friendly fraud.
How does friendly fraud happen?
Friendly fraud chargebacks take place for a few different reasons.
The customer forgets that they made the purchase.
Another household member uses the customer’s credit card to make the purchase.
The customer doesn’t want to pay for the item.
In any of these situations, the customer files a chargeback claim with the bank or credit card company to get their money back. With friendly fraud, the claim will usually state that the transaction was unauthorised. Issuers have certain obligations to back the cardholder over the merchant under consumer protection laws, which results in an automatic chargeback or refund.
One of the reasons why friendly fraud can be so difficult to fight is that the dispute takes place several weeks after the transaction. This makes it harder for the merchant to go back into their own records and find out what happened.
As a result, merchants stand to lose quite a bit of money in overhead costs:
Initial price of good or service
Transaction processing fees
Friendly fraud example
It’s difficult to determine whether friendly fraud is intentional or not at first glance. Although some customers actively make a habit of purchasing items they tend to dispute, many cases are accidental. As a friendly fraud example, imagine that a child gets a hold of his dad’s credit card or logs onto a website to make a purchase without his parents’ knowledge. The parents would be able to request a chargeback for these purchases, without any ill intent on their part.
How to prevent a friendly fraud chargeback
No matter the cause, friendly fraud ecommerce costs can be steep for an online business. What are your options when it comes to preventing this type of loss? While consumer protection laws are strong, there are still some actions that merchants can take.
Make sure your business is easily identifiable on bank statements. You can set your store name to be part of the descriptor so that there’s no confusion when customers see the charges.
Be available to answer queries about charges with 24/7 customer service. If customers are genuinely confused about a transaction, they often turn to the business first before requesting a chargeback.
Offer free, trackable shipping to make the returns process as easy as possible. You not only want your products to get there on time, but you also want to make it easy for customers to simply return an item if it’s not as described.
As a last resort, you might want to blacklist customers if they file a dispute or chargeback. While most customers are honest, unfortunately there are a few who will take advantage of the system when allowed to do so. In the case of friendly fraud ecommerce repeat offenders, the risk of future chargebacks outweighs the cost of losing their future sales.
By staying on top of your customer service and being aware of any red flag buying behaviour, you can reduce the impacts of friendly fraud on your bottom line.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.