Merchants that don’t know how to prevent friendly fraud will often get hit with chargebacks.

This is because it’s hard to know when an authorized cardholder will intentionally make a purchase from an eCommerce store, receive the merchandise or service as agreed, and then file a chargeback anyway.

But despite that, it’s not impossible for merchants to protect themselves. Here’s what you can do to fight back.

How to Prevent Friendly Fraud

How to Prevent Friendly Fraud

  1. Document every interaction with every customer

    The more evidence you can provide that the transaction was conducted legitimately, the better your chances of winning. Keep records of every touchpoint from placement through fulfillment.

  2. Require shipping tracking and delivery confirmation.

    Keep records of every order shipped and require proof of acceptance so a customer can’t claim they never received the merchandise they ordered.

  3. Always send recurring payments reminders.

    Send subscribers automatic reminders before any recurring payment so they can’t claim they didn’t know it was going to be charged.

  4. Provide excellent product descriptions in online catalogues and product pages.

    Clearly label products and services and lay out customization options so customers can’t claim they didn’t receive what was advertised.

  5. Have a clear, well-crafted returns policy.

    Prominently lay out the steps for how customers must return items so they can’t claim they returned the product and it’s the merchant’s fault for not processing it properly.

  6. Have quick turnover times for refund processing.

    Process refunds as quickly as possible so customers can’t claim they only filed a chargeback because it took you too long to process a refund.

  7. Use prominent billing descriptors.

    Ensure a recognizable business name appears on billing statements, so customers can’t claim they didn’t know where a charge came from.

  8. Identify which chargebacks are friendly fraud.

    Every major payment network provides merchants with chargeback reason codes. Know which ones indicate friendly fraud activities like recurring payment disputes, non-receipt of item, etc.

  9. Organize relevant documentation.

    Once the customer’s justification for filing a chargeback is known, gather the information from corporate records necessary to fight it.

  10. File a chargeback rebuttal letter.

    Inform the bank the company disputes the card holder’s claim. Merchants only have a small window to challenge a chargeback before they lose the right to do so. Visa gives merchants 30 days; The Visa chargeback dispute time limit is 30 days; the Mastercard chargeback dispute time limit is only 7-10 days.

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 get a handle on the problem. 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.


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