Merchant Fraud Journal

Friendly fraud is when a card holder files a chargeback to dispute a charge for a transaction despite the fact that either they, or someone in their family, intentionally ordered and successfully received the goods or services. Usually, the card holder will falsely tell their bank the purchases were fraudulent, or that they never received what they paid for.

Card holders commit friendly fraud for a variety of reasons.

One common reason is automatic recurring subscription billing. Sometimes, merchants do enter people into a recurring subscription plan without their knowledge and/or consent. Other times, people will have buyer’s remorse. Either way, card holders will use chargebacks as a way to avoid payment without having to “fight about it” with the merchant. The chargeback codes for automatic billing subscription disputes are:

• Merchant ignored cardholder request to end recurring billing: Visa chargeback code 41; MasterCard chargeback codes 4841 and 4860; American Express chargeback codes 4544, C05, and C28; Discover chargeback codes 4541 and AP
• Cardholder did not agree to recurring transactions. Visa chargeback code 57, American Express chargeback code 176
• Cardholder did not recognize merchant’s billing descriptor. Visa chargeback codes 72 and 75; MasterCard chargeback codes 4863 and 4837; American Express chargeback codes 177; Discover chargeback codes 6021, 7010, and AA
• Card inactive or expired when charged for recurring billing. Visa chargeback code 73; MasterCard chargeback code 4835; American Express chargeback code F22; Discover chargeback code EX

A second possibility is the card holder’s minor children used the card without their consent. These unauthorized charges often make headlines, such as when children purchase in-game video add-ons for games such as Fortnite:

In these cases, the law often releases the adult card holder from responsibility for the payment on the theory that they didn’t authorize the purchase. In 2014, Apple was forced to pay out over $30 million dollars by the Federal Trade Commission to parents whose minor children had made unauthorized app purchases.

A third possibility is that the card holder felt the merchandise they received was either defective or not as advertised. In these cases, card holders file chargebacks because they don’t want to have to argue with merchants over whether or not they are entitled to a replacement or refund.

A fourth possibility is a card holder honestly (if incorrectly) believes that chargebacks are intended as a mechanism that allows them to receive a quick refund for goods that, for whatever reason, they either aren’t happy with or did not receive. They may even try to contact the merchant after the fact to try and return the merchandise or ask why it never arrived.

How to Prevent Friendly Fraud

Friendly fraud is impossible to detect because the purchase is made by the legitimate card holder, who only takes fraudulent action after receiving the goods. Because the process form order to fulfillment is entirely legitimate, no fraud filters or AI-based tools can detect it.

However, that doesn’t mean merchants are helpless. There are things they can do throughout the order, delivery, and receipt process to arm themselves with information that will help them to fight friendly fraud after receiving notice of the chargeback. This is not ideal, but by taking a few steps to document key parts of an order, merchants can prove that a cardholder intended to make the purchase and therefore remains responsible for paying for it.

What Are the Costs of Not Knowing How to Fight Friendly Fraud?

Although fighting friendly fraud is a detailed and ongoing process, the problem is too large to ignore. Moreover, it’s worse than many merchants realize. Contrary to popular belief, this type of fraud actually costs the average business more than chargebacks. In fact, research shows that for every $1.00 the average merchants looses to chargebacks, they lose $3.08 to friendly fraud.

The reason for this is the value of the stolen item is just one part of the loss. A lot of the damage comes from fees and penalties the merchant incurs at many stages of their order fulfillment chain.

Here are the other costs to keep in mind when calculating the costs of a friendly fraud problem:

• Order fulfillment costs. The organizational overhead required to produce, store, and package an order.
• Shipping costs. The money spent for carriers to deliver an order.
• Payment processing fees. Any service fees incurred as a result of the sales transaction are gone.
• Chargeback fees. Payment processors fine merchants for every chargeback on their account.
• Increased processing fees. Merchants that go over a certain threshold percentage of chargebacks to orders processed can see their card processing fees rise.
• Loss of card processing abilities. In the worst case, they can have their ability to process card transactions revoked entirely.
• Costs of fighting chargebacks. Merchants must devote resources to fighting fraud, instead of using their time and money on core business activities.

Why Is It so Hard to Prevent Friendly Fraud?

Despite the high costs incentivizing a solution, the fact that everything prior to the chargeback is the same as a legitimate sale makes it hard to prevent friendly fraud. In other words, it’s not something even the top chargeback protection solutions can detect.

Unfortunately, the trend is for merchants to experience increasing levels of friendly fraud. The reason for this mostly ties back to a lack of incentive for banks to tackle the problem. Here’s why:

• Banks want to keep customers happy. Chargebacks are a customer service procedure to protect credit and debit card users from unscrupulous merchants. This makes customers feel safe about tying their money to a card subject to theft. Swo, hile banks will take away the cards of serial friendly fraud offenders, they generally will turn a blind eye to this kind of behavior unless the merchant forces them to take action.
• Banks are not liable for chargebacks. The banks’ indifference occurs because all the liability for chargebacks rests with the merchant. So, while they may make some attempts to prevent them, there is little incentive for them to expend lots of resources on the problem. Moreover, banks know that merchants must be able to accept card transactions. There is no risk of them discontinuing their acceptance of credit cards and little risk of them even switching to another bank.
• Chargebacks are easy and convenient for shoppers. The banks’ incentives mean they make it effortless for card holders to file chargebacks. They call their bank, request one, and it’s done. And with chargebacks costing banks none of their own revenues, their incentive to uncover fraudsters is minimal.

With all this in mind, merchants can expect the problem to continue. Ultimately, that further underscores the need to continue working to do as much as possible to mitigate the damage.

Merchants Can Still Protect Themselves

Despite all these difficulties, friendly fraud is a problem that cannot be ignored. Moreover, it’s just one of the many types of eCommerce fraud merchants must protect themselves against. However, there is hope.

To minimize their risk and exposure, merchants should take the time to follow friendly fraud best practices. That means doing things like utilizing the best fraud prevention tools, paying attention to merchant statements, and communicating with customers constantly to avoid confusion or frustration.

It’s not easy, but with just a little bit of work merchants can greatly reduce instances of friendly fraud, and also prepare to minimize their impact if and when they occur.