How to Prevent Friendly Fraud
Friendly fraud is a serious threat to your business, but what exactly is it, and how to prevent
friendly fraud?
Let’s figure this out together.
According to a 2020 report by FIS Global, friendly fraud accounts for 70% of all credit card fraud, which leads to industry losses of more than $132 billion a year. So, without any doubt, friendly fraud chargeback is a serious threat to your business, but what is friendly fraud, how exactly can it damage your merchants, and how to prevent it?
What Is Friendly Fraud?
Friendly fraud, also known as receptive chargebacks and customer disputes, occurs when a cardholder questions a legitimate purchase on their statement. They initiate a process to reclaim funds, even though they or someone authorized by them have made the transaction. Though friendly fraud chargebacks are usually conducted by cybercriminals, not all of them are pure fraud. In fact, there are two main types of credit card friendly fraud, which are:
- Transaction confusion. This can be called an accidental friendly fraud that occurs when a customer does not recognize a transaction in their statement and, therefore, makes a chargeback request since they believe they were a victim of a cybercriminal.
- “First-party fraud.” This type occurs when an unauthorized user or someone in the household makes a purchase without a cardholder’s permission. In this case, when the cardholder sees this transaction, they can file a dispute.
As you can see, friendly fraud chargeback usually isn’t caused by digital fraudsters, yet still it is something you want to minimize since it is a rather serious threat for your merchants.
Why Is Friendly Fraud So Common?
Several factors are fueling the rise of deceptive chargebacks. The e-commerce boom and the shift towards digital payments, coupled with a decline in cash transactions, have created a climate of transaction ambiguity. Often, credit card statements lack clear and recognizable merchant names, leading cardholders to misidentify legitimate purchases as fraudulent.
Furthermore, the proliferation of connected devices storing payment information, from smart speakers to streaming services, increases the possibility of unauthorized purchases by authorized users. Many issuers maintain zero-liability policies, protecting cardholders from unauthorized charges. Consequently, they often grant chargebacks for disputed transactions unless they can conclusively verify the legitimacy of the purchase and the cardholder's (or authorized household member's) involvement.
Friendly Fraud vs. Chargeback Fraud
Pretty often, friendly fraud is confused with fraudulent chargebacks. However, these two are completely different things. Though both friendly fraud and chargeback fraud are pretty bad for your merchants, they aren’t the same. As we have already mentioned above, friendly fraud is, in many cases, accidental and occurs due to confusion or authorized payments that are usually done by people from the same household. At the same time, chargeback fraud is a deliberately opened dispute by a customer who ordered and paid for a product or service and received that product/service of proper quality. In other words, a customer demands a refund for the product or service they received and used, which is illegal in many countries. A simple example of a chargeback fraud would be purchasing a movie on a streaming service, watching it, and requesting a chargeback right away. So, do not confuse these two notions anymore.
Friendly Fraud’s Potential Dangers
Though friendly fraud chargebacks aren’t a scam scheme, they are still a pretty serious threat to your merchants that must be taken into consideration. As a matter of fact, friendly fraud consequences are rather unpleasant for businesses and, in the worst-case scenario, can even lead to merchants' closure. Thus, let’s take a look at the potential dangers of friendly fraud:
-
Higher number of chargebacks.
Though friendly fraud is not chargeback fraud, it still involves opening a dispute and making a chargeback request, and too many chargebacks are bad for your merchants and can even lead to their closure. -
Poor customer experience.
Transaction confusion and related issues do not help provide the best customer experience and, therefore, decrease customer trust, which leads to losing clients and profits. -
Bad data.
Friendly fraud disputes, categorized as true fraud, can trigger a surge in erroneous declines. This means legitimate transactions are flagged and blocked due to suspicion, causing unnecessary friction for cardholders.
Thus, though friendly fraud chargeback is not a pure scam, it still comes with financial and reputational losses, so you have to make sure you minimize the number of friendly fraud chargebacks on your business website.
How to Prevent Friendly Fraud?
Friendly fraud prevention is a serious issue that must be dealt with in time, but how to prevent friendly fraud? There are a few sure ways:
-
Reducing transaction confusion.
Mitigating ambiguity surrounding transactions is crucial for curbing illegitimate chargebacks and fostering a positive customer journey. Fortunately, collaborative solutions exist to address this challenge. -
Clear communication.
Prioritize transparency in billing descriptions and strive for clarity and recognizability for your customers. -
Detailed record-keeping.
Implement a robust transaction recordkeeping system like Germius. This system should capture all relevant details, including customer interactions and delivery verifications. By maintaining such comprehensive records, you'll be well-positioned to comply with Visa's Compelling Evidence 3.0 requirements.
All in all, friendly fraud prevention comes down to a decent payment orchestration system that will help you process online payments securely and stress-free. So, if you are interested in such a system, reach out, and we will provide you with more info about Gemius.
Final Thoughts
Friendly fraud definition is pretty simple, yet still many people confuse it with chargeback fraud and other online scams. So, we hope that our article helped you answer the question of what is friendly fraud chargeback as well as how to prevent it, and now you know how to protect your merchants and the reputation of your business.
