Friendly Fraud: A Primer

What is Friendly Fraud?

Friendly Fraud, often called “chargeback fraud”, is the largest category of chargebacks that most high risk business face. It describes situations in which customers illegitimately dispute a transaction with their credit card issuer instead of contacting the merchant for a refund. The customer might give one of a number of reasons to the credit card issuer for initiating the chargeback. These include:

• The product / service wasn’t delivered.
• The product / service wasn’t as described or was defective.
• The transaction was not authorized.

These are the stated reasons the customer gives, but the actual reason in situations of friendly fraud are often:

• The customer wanted to get the product / service for free.
• The customer decided they didn’t want the product / service after all, but didn’t qualify for a traditional refund.
• Another member of the family made the charge, but the primary cardholder doesn’t want to pay for it.
• The customer forgot they made the charge.

And perhaps the biggest reason that customers engage in friendly fraud, is that it’s easier and less awkward for the customer. In fact, a recent study by eConsumerServices indicated that 81% of cardholders filed a chargeback out of convenience, rather than taking the time to contact the business for a refund.

Why Do Customers Get Away With Friendly Fraud?

1. Reason codes don’t accurately describe the dispute.
   • A responsible small business owner who is faced with a flurry of chargebacks with reason codes that indicate that the product was never delivered, or the transaction not authorized, will try to address the issue by looking at their shipping fulfillment company, or by locking down security on their sales team. Unfortunately, they’re addressing a problem that may not actually exist, when the real reason for the friendly fraud is something else entirely.
2. Identifying actual v. stated credit card fraud is really hard.
   • The public is well aware of the numbers of credit cards that have been stolen and used by fraudsters. Unfortunately, that fact makes it seem very credible when a customer states to their credit card issuer that they don’t recognize a charge, and therefore it must be fraud.
   • That puts a heavy onus on the business to ‘disprove fraud’ which is actually pretty hard to do, particularly in a MoTo or eCommerce setting where you don’t have a customer’s actual signature.
3. Banks have little incentive to investigate friendly fraud.
   • A credit card issuer’s customer is the cardholder. Most good businesses don’t accuse their customers of fraud, and thus either do credit card issuers. They process chargeback claims assuming that the customer is legitimately filing a complaint with virtually no investigation into whether that claim is legitimate.
4. Businesses’ aren’t good at fighting chargebacks.
   • Whatever your business is, you’re probably good at it. What you’re probably not very good at, is fighting chargebacks. The chargeback dispute process is very time sensitive, very technical (don’t to acceptable paper sizes, font sizes, letter margins, etc.), and takes a long time. Consequently, most small businesses fight the first couple of chargebacks they get, lose them, and then just stop fighting them altogether.

How Do I Fight Friendly Fraud?

There are a number of solutions that business’ can take to minimize, avoid, and successfully fight friendly fraud. At Soar Payments, we incorporate a number of chargeback mitigation services into our payment gateway and merchant accounts. If you’d like to learn more, or obtain a merchant account from Soar Payments, apply online.