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.

In this post we’ll discuss the following aspects of Friendly Fraud:

What are the Reasons for Friendly Fraud?
How Can Merchants Detect Friendly Fraud?
What are the Costs of Friendly Fraud?
How Can Merchants Protect Themselves Against Friendly Fraud?

What are the Reasons for Friendly Fraud?

#1: 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

#2: Children using the card without permission

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.

#3: Poor customer experience

Card holders will sometimes use chargebacks to recoup their money if they believe 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.

For this reason, merchants must always strive to not only provide the best customer experience possible, but also document every aspect of their transactions with customers. Merchants are more likely to increase their chances of winning the chargeback representment process if they can provide detailed information about every stage of an order, from fulfillment through to deliver.

#4: Customers misusing chargebacks

Some card holders do honestly (if incorrectly) believe 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.Merchants should have procedures in place to recognize when these customers reach out.

Often, a quick refund will eliminate a painful chargeback. In addition, merchants can mitigate this problem by prioritizing customer service, and making it easy for customers to figure out how to request a refund.

How Can Merchants Detect 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:

  • Document every interaction with every customer. According to MasterCard, 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.
  • Require shipping tracking and delivery confirmation. Keep records of every eCommerce order shipped, and require proof of acceptance and fulfillment so a customer can’t claim they never received the merchandise they ordered.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • Organize relevant documentation. Once the customer’s justification for filing a chargeback is known, gather the information from corporate records necessary to fight it.
  • File a chargeback rebuttal letter. Submit a formal chargeback rebuttal letter to 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 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.

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.

How Can Merchants Protect Themselves Against Friendly Fraud?

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 be doing things like working with the best fraud prevention companies, 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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