What Is Accidental Friendly Fraud & How Does It Work?
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Friendly fraud is more common than most entrepreneurs believe and the reason it is so common is the fact that, in many cases, it is accidental. As a matter of fact, according to Expert Market research, friendly fraud is growing by about 41% every couple of years. Moreover, it is estimated that 86% of chargebacks are considered cases of friendly fraud. So, what is accidental friendly fraud, and how does one deal with it? Let’s figure it out together in this article.
What Is Accidental Friendly Fraud?
Friendly fraud, or an illegitimate dispute, occurs when a cardholder identifies a transaction in their statement as fraudulent and issues a dispute. It is called friendly because, in many cases, it is accidental and happens due to transaction confusion or poor communication between the customer and the seller. At the same time, friendly fraud also occurs when somebody in a cardholder’s household or a third party uses the cardholder’s card to make online purchases without letting them know.
At first sight, accidental friendly fraud seems pretty harmless, and it seems like it does not happen too often. Yet, in fact, it is pretty common, and friendly fraud rates increase every year. In terms of potential dangers for businesses in particular, friendly fraud consequences are actually pretty nasty and lead to significant revenue losses and, in the worst-case scenario, to merchants' closure. Thus, it’s important to know how accidental credit card fraud works as well as how to reduce it.
How Does Accidental Friendly Fraud Work?
Accidental friendly fraud is not as sophisticated as other types of financial fraud, and the mechanism of its work is pretty simple. In most cases, due to transaction confusion and suspicion of fraud, a cardholder questions a transaction and contacts their credit card issuer. The cardholder claims they didn’t make a certain transaction in their statement, and the card issuer starts a chargeback procedure. Throughout the dispute procedure, the card issuer investigates the case, and if they confirm the transaction was illegitimate, they request a chargeback from the merchant and refund the customer. The problem is, in many cases, it is businesses that suffer from accidental friendly fraud since they often have to refund a customer and pay dispute fees. This is why it is so important to use accidental friendly fraud prevention solutions like the ones available within Germius.
Is Accidental Friendly Fraud Illegal?
The legitimacy of accidental friendly fraud is more complicated than this type of fraud itself. As customers, accidental fraudsters (in case a chargeback was really issued because of transaction confusion and it’s been only one instance) usually do not get punished, yet everything depends on the legislation of each particular country. So, it’s obviously not legal to scam online stores and request chargebacks, but in case it is really accidental and happened just once, you most likely won’t get in trouble.
As a business owner, you surely cannot be punished by law for receiving fraudulent chargeback requests (but only if those are proven to be fraudulent). At the same time, you can get in trouble simply for having too many disputes since, though these chargeback requests are accidental, too many of them can still lead to penalties from credit card networks and ruin your relationships with your payment processor. Thus, just like genuine fraud, accidental friendly fraud must be prevented for your business’s sake.
Types of Accidental Friendly Fraud
Friendly fraud is not too complicated, and there are not many types of it. As a matter of fact, chargeback requests connected with friendly fraud occur for two main reasons, which are:
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Transaction confusion
This is pure accidental friendly fraud that happens when a customer simply forgets about a certain purchase they made and believes they were a victim of fraud. In fact, this type of friendly fraud can be easily prevented even without any specific software. The secret here is to keep in touch with your customer and provide them with all the updates about their purchase, including payment status, shipping details, return and refund policies, etc.
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First-party fraud
In case an unauthorized user or somebody else in a cardholder’s household uses their credit card to make a purchase without letting them know, this is first-party fraud. For example, when a household member uses a saved credit card (which is on file in certain online stores or streaming services) to complete online payments. Though it might be accidental fraud, it is still fraud, and the cardholder can open a payment dispute and request a chargeback. To prevent this type of friendly fraud, it is best to use special software like the tools available within Germius CRM.
All in all, the most common type of accidental friendly fraud is transaction confusion, so you have to make sure to provide your customers with all the required info about their purchase to minimize the risks of a dispute. At the same time, in cases of first-party fraud, chargeback prevention alerts and fraud protection solutions will help you out.
What Are the Consequences of Accidental Friendly Fraud?
As we have already mentioned above, accidental friendly fraud is, in any case, bad for your business, and it eventually leads to rather unpleasant consequences. In particular, too many chargeback requests due to friendly fraud cause the following problems:
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Penalties
Though it might be unintentional, friendly fraud still is one of the most common reasons for penalties from credit card networks, and those penalties can be quite costly, which is a particularly nasty consequence of mere transaction confusion. -
Revenue loss
Another unpleasant consequence of accidental friendly fraud is revenue loss. In most cases, businesses still end up refunding customers, paying dispute fees, and losing the money spent on marketing campaigns. In fact, pretty often businesses lose twice as much of the initial payment. This is, with no exaggeration, too much, and a lot of businesses simply cannot afford that.
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Merchant accounts closure
In the worst-case scenario, too many chargeback requests can completely ruin the relationship with your payment processor and lead to your merchant accounts closure. This is perhaps the worst consequence of accidental friendly fraud and this consequence is the most difficult and expensive to deal with. -
Dispute fees
Lastly, accidental friendly fraud always leads to a dispute, and a dispute always leads to associated fees. So, to avoid paying costly dispute fees, it’s best to prevent accidental friendly fraud, no matter how innocent it might seem at first sight.
As you can see, there are many pretty unpleasant consequences of accidental friendly fraud, and dealing with the problems we described above is more challenging and expensive than preventing friendly fraud. Luckily, both accidental and genuine fraud can be prevented by the solutions available within Germius CRM, so make sure to take a closer look at it.
Conclusion: How to Protect Your Business Against Accidental Fraud
It goes without saying that businesses must take measures and all the necessary precautions to prevent friendly fraud or at least decrease its rates. Yet, doing so is more challenging than most entrepreneurs might think. Fortunately, there are some ways for businesses to protect themselves against accidental fraud. Apart from clear communication with your customers that includes comprehensible refund and return policies and regular updates about purchase status, you also need to use up-to-date anti-fraud solutions that will provide reliable protection against all types of fraud.
Germius CRM offers great functionality that will fully protect your merchant accounts from accidental friendly fraud and, therefore, save your revenue and reputation. Chargeback prevention alerts (Ethoca and Verifi) that you can get within our CRM cover most payment processors and provide reliable protection against both friendly and genuine fraud. So, why don’t you explore Germis and find out more details about how we can help you solve the problem of accidental fraud once and for all?
