The rapid growth of eCommerce in recent years has brought an alarming rise in credit card fraud. In 2023, Statista estimated eCommerce losses from online payment fraud to be worth US$48 billion globally – a figure that’s forecasted to hit US$91 billion in 2028. A plausible explanation as to why fraudulent online payments are climbing is the nature of eCommerce sales and card not present transactions in general.
Every customer who makes an online purchase via a credit or debit card can file a chargeback, which enables them to dispute the card payment through their issuer. In fact, merchants estimated that 44% of chargeback cases were the result of friendly fraud in 2023. In this article, we'll help you get better insight into what friendly fraud is, how it can hurt businesses and what steps merchants can take to avoid friendly fraud. Let's get into it!
What is friendly fraud?
Friendly fraud is a type of chargeback that occurs in situations where a customer obtains products or services from a merchant, but then contacts their issuing bank and requests a chargeback for their legitimate transaction. Unlike traditional forms of fraud perpetrated by malicious actors, friendly fraud occurs when legitimate customers exploit the chargeback process for their own benefit.
The term 'friendly' in friendly fraud can be misleading, as there's clearly no actual friendliness involved. Instead, it refers to the seemingly non-malicious intent of the customer, who may genuinely believe they are justified in seeking a chargeback.
Common reasons for friendly fraud
However, not all 'friendly fraudsters' have malicious intent. There are instances where a customer has made a genuine mistake, or a misunderstanding has taken place. Here are some common reasons that may lead to friendly fraud:
Forgetfulness
Forgetfulness often plays a significant role in friendly fraud. With the sheer volume of transactions consumers engage in, it's easy to overlook or fail to recognise a charge on their card statement. This unintentional forgetfulness can lead to chargebacks initiated by well-meaning customers who simply don't recall making a specific purchase.
Misunderstandings
Confusion or dissatisfaction with a purchase due to misunderstandings about return policies, billing practices or transaction terms can also contribute to friendly fraud. Lack of clarity regarding the terms of sale and discrepancies between merchant promises and received products or services exacerbate these misunderstandings, increasing the likelihood of disputes.
Impulsive buying
Impulsive buying, especially in eCommerce, can trigger friendly fraud. Consumers may succumb to tempting offers or make emotional purchases without rational consideration. The ease of initiating online chargebacks further encourages reversing hasty or inadequately considered purchases.
Types of friendly fraud
The main types of friendly fraud that merchants need to be aware of are:
Chargeback fraud
Chargeback fraud occurs when a customer disputes a legitimate transaction with their bank or credit card issuer, alleging it as unauthorised or fraudulent. Unlike traditional fraud, where a third party steals a cardholder's information, chargeback fraud involves the cardholder initiating the dispute.
Refund abuse
Refund abuse involves exploiting a merchant's return or refund policy for personal gain. In this scenario, a customer purchases an item with the intention of returning it after use, regardless of its condition. Refund abuse not only causes financial losses for merchants but also undermines the integrity of their return policies and erodes trust between merchants and customers.
Family fraud
Instances of unauthorised credit or debit card use can contribute to disputes and chargebacks in friendly fraud cases. Family fraud involves cardholders disputing legitimate transactions made by family members or others with card access. In such cases, the cardholder may genuinely believe the transaction is unauthorised and seek a chargeback to address the situation. For example, in a friendly fraud case, a child may use the father’s card to pay for a smartphone game app.
What's the difference between friendly fraud and true fraud?
Despite its seemingly innocuous name, friendly fraud can have significant repercussions for merchants. Unlike true fraud or identity theft, where a third party uses a cardholder's information without authorisation, friendly fraud involves the actual cardholder or someone within their household making a purchase. This scenario, also known as second-party or family fraud, is commonplace in friendly fraud cases.
In contrast, true fraud often involves more malicious tactics such as an 'account takeover', where hackers gain access to a cardholder's account through hacking or social engineering methods like phishing. Phishing attacks attempt to deceive consumers into revealing personal information, including card and bank account details, by impersonating trusted entities like family members or reputable companies.
Regardless of the circumstances, defending against chargebacks associated with friendly fraud poses challenges for merchants. Even when transactions appear legitimate, merchants must navigate complexities and uncertainties, whether the fraud is intentional or due to ignorance. For merchants, minimising chargeback ratios is crucial for maintaining profitability and safeguarding their business reputation and customer loyalty.
How can friendly fraud impact businesses?
Friendly fraud poses significant risks to businesses across various industries, with potential repercussions that extend beyond financial losses. Among the potential adverse effects of friendly fraud for businesses are:
Financial losses
Friendly fraud can inflict immediate financial losses on businesses, resulting from disputed transactions and chargeback fees. These losses directly impact a merchant’s bottom line, reducing revenue and profitability.
Chargeback fees and penalties
Repeated instances of friendly fraud can lead to higher processing fees and increased scrutiny from payment processors and financial institutions. Elevated chargeback ratios may trigger penalties, fines, or even the suspension or termination of merchant accounts if the chargebacks exceed the relevant thresholds set by the schemes.
Harm to reputation
Beyond financial implications, friendly fraud can negatively impact a business' reputation and erode customer trust. Each disputed transaction signals dissatisfaction or distrust on the customer’s side, potentially leading to negative reviews, word-of-mouth backlash and a diminished brand image. In an era where online reputation plays a crucial role in consumer decision-making, the fallout from friendly fraud can be particularly harmful for merchants.
Administrative burden
Handling chargeback disputes entails a significant administrative burden for businesses, diverting time, resources and fraud prevention costs. From gathering evidence to responding to enquiries and disputes, managing chargebacks requires meticulous attention to detail and swift action. This administrative overhead can put strain on internal processes and disrupt workflow, hindering productivity and efficiency.
How to prevent friendly fraud?
If you’re a merchant looking to combat chargebacks related to friendly fraud, implementing best practices and maintaining detailed documentation for every payment is crucial. This extends beyond customer service, encompassing improvements to the visibility of your business' terms and conditions and clarifying policies about refunds and cancellations.
Friendly fraudsters target vulnerabilities in your business operations, so it's essential to apply comprehensive fraud prevention measures to safeguard your revenue. Here are some strategies and best practices you can take to minimise and protect your businesses from this type of fraud:
Tap into Strong Customer Authentication (SCA)
Implementing SCA or two-factor authentication adds additional layers of security and can help reduce friendly fraud attacks. As a key part of the PSD2 legislation, it shifts liability away from the merchant and onto the cardholder’s bank, emphasising the importance of fraud detection and protection for a secure checkout experience.
Additionally, transactions authenticated with 3D Secure 2.0 have the potential for higher acceptance rates and offers a higher level of protection, contributing to a smoother payment journey for consumers.
Implement Address Verification Service (AVS)
AVS compares the billing address provided by the customer during checkout with the address on file with the card issuer. Mismatches can indicate potentially fraudulent activity and prompt further verification steps.
Improve customer communications in relation to payments
Improving customer communications in relation to payments is a vital strategy for merchants to combat friendly fraud effectively. By ensuring transparency and clarity throughout the payment process, merchants can significantly reduce the likelihood of misunderstandings and disputes. Clear communication regarding billing descriptors, transaction details, and refund policies can empower customers to recognise and authenticate legitimate transactions, thereby minimising potential chargebacks.
Additionally, proactive engagement through timely notifications about payment activities and concise instructions on how to resolve any issues can foster trust and strengthen the merchant-customer relationship, further deterring fraudulent claims. For instance, if a customer encounters an unfamiliar card charge on their statement, providing clear instructions on how to resolve the issue, such as directing them to a dedicated customer support line or email, can prevent the customer from filing a chargeback due to confusion. By addressing customer concerns promptly and offering accessible channels for resolution, merchants demonstrate their commitment to customer satisfaction.
How emerchantpay can help?
In the modern payment ecosystem, successfully processing a card transaction doesn't always guarantee that a payment won’t result in a reversal. Friendly fraud chargebacks are a constant concern, especially in online card acceptance. When authorised cardholders request chargeback reversals, merchants must be prepared to take the appropriate action.
There are an array of tools and methods you can apply to help mitigate the risk of friendly fraud and chargebacks overall. With the aid of a dedicated payment service provider, you can weather the storms of transaction disputes. With over 20 years of experience, emerchantpay is a trusted payment partner, providing merchants globally with robust anti-fraud protection tools and strong chargeback management capabilities, enabling them to mitigate the threat of friendly fraud and grow sustainably.
To find out more, get in touch with our team of payment experts today.