Merchants who deal with chargebacks can be surprised to find how many of them turn out to be classified as “friendly fraud” rather than true fraud. “True” fraud happens when bad actors steal a person’s credit card information. Friendly fraud in contrast is committed by the cardholder themselves, either intentionally or unwittingly. Unlike true fraud, friendly fraud can be contested via the representment process in order to rescind the chargeback, so it’s important to know which is which to reduce the chargebacks you receive as much as possible.
So. what is friendly fraud?
This type of fraud refers to chargeback requests that are not legitimate but occur due to customer confusion or intent rather than due to true fraud.
Types of friendly fraud
There are four main types of friendly fraud. They are:
- Customer intent (aka Chargeback Fraud): Unfortunately, some customers take advantage of the chargeback process to try and receive goods or services without paying for them. This can occur when they receive goods but then claim they didn’t and initiate a chargeback with their credit card company.
- Customer confusion: In some cases, a customer will not recognize the merchant descriptor on their credit card statement, leading them to request a chargeback even though they actually received the goods in question.
- Customer disappointment: If a customer feels that a merchant’s advertising was deceptive or misleading in some way, it can result in a chargeback. This could be the result of advertising that oversells a product’s qualities or visual depictions of a product that are seen as deceptive.
- Family fraud: In the era of widely available online products, chargebacks can result from purchases by family members other than the one whose name is on a card. For instance, children using their parent’s credit card to make online purchases. In some cases, such as in-app purchases of virtual items for real money, children can run up large bills without fully understanding what they are doing.
Why Is stopping friendly fraud so important?
The consequences of chargebacks, whether as a result of friendly fraud or true fraud, can be highly damaging to your retail business. Besides the cost itself, which typically equals more than double the amount of the original transaction after fees are taken into account, there is also the danger chargebacks represent to your credit card processing. As your chargeback-to-sales ratio approaches 1%, your processing fees get progressively more expensive and can ultimately result in termination of your processing altogether.
As a result, taking steps to avoid friendly fraud as much as possible is essential to keep your chargeback ratio down and avoid excessive expenses.
How to Prevent Friendly Fraud
While it may be impossible to stop friendly fraud entirely, there are steps you can take to effectively reduce its frequency and to limit the damage it causes. These include:
- Advertising that matches the product: To avoid chargebacks due to customer disappointment, it’s important to make sure that your advertising describes your products as accurately as possible.
- Proactive customer service: To avoid chargebacks due to customer disappointment, it’s important to train your staff to respond quickly to customer concerns. This is especially helpful in preventing chargebacks that stem from customer confusion.
- Accurate merchant descriptor: To avoid friendly fraud due to customer confusion on their billing statements, make sure that the description of your statement descriptor is easy to link back to the products they have purchased. It’s also good to include a phone number with the description so customers can call in case of any questions.
- Offer refunds: When dealing with family fraud, a generous refund policy can go a long way towards preventing chargebacks. Such a policy also helps earn your company a good reputation for dealing fairly with customers.
- Keep accurate records: When facing friendly fraud in the form of a chargeback, it’s vital to keep good records for successful representments. If a customer claims they never received a product, but you have proof of delivery, whether physically or virtually, this will bolster your chances of recovering your revenue from the chargeback. Receipts and other related records such as customer emails or conversation logs go a long way to improving your chances of making your case.
- Maintain a blacklist: One tactic that can be used when dealing with chargebacks stemming from customer intent is to keep a blacklist of customers who have previously filed chargebacks in order to stop repeat offenders.
Understanding and Dealing with Friendly Fraud
The merchant chargeback system offers opportunities for unscrupulous individuals to attempt to defraud retailers, meaning that friendly fraud is likely to continue to be an issue for the foreseeable future. Understanding how it works and how to combat it is crucial to avoiding the significant costs friendly fraud can generate.
In some cases, merchants may be able to make adjustments to their transaction stream to disrupt family fraud, such as requiring two-factor authentication or other similar measures. Even if you can’t eliminate friendly fraud entirely, working with a chargeback management company to reduce its frequency is good for your bottom line and also for keeping your chargeback ratio at an acceptable level. Customer service is key to this effort, but merchants should also be prepared to present evidence supporting their claim when opposing chargebacks through the representment process.
This guest post was contributed by ChargebackHelp.com