Understanding and Preventing Friendly Fraud: A Guide for Merchants

Friendly fraud, or when consumers intentionally submit false fraud claims, continues to be a major problem for merchants. This type of fraud is particularly prevalent with card-not-present payments, which have become increasingly common due to the convenience of online shopping. The result of this fraud is a significant increase in chargeback volume, with false disputes costing merchants around the world $125 billion each year.

Dealing with friendly fraud through the chargeback process can be challenging and costly due to several issues. In this article, we will explore five of these issues and discuss potential solutions for merchants.

The Challenges of Dealing with Friendly Fraud Chargebacks

Friendly fraud, also known as chargeback fraud, occurs when a consumer disputes a legitimate purchase with their financial institution, causing the merchant to lose both the product and the revenue from the sale. This can be difficult for merchants to identify and resolve, resulting in significant losses. Here are five common issues that merchants face when dealing with friendly fraud chargebacks.

Identifying potential friendly fraudsters

It can be difficult for merchants to determine who might engage in friendly fraud and the intent behind the dispute, as many customers dispute a credit charge without any malicious intent. For example, a long-time customer might forget a purchase or not recognize the shop name on their bill, leading to a chargeback. Alternatively, other consumers may be dissatisfied with a product and file a chargeback with their bank instead of contacting the merchant's customer service for a refund. In either case, the intention and origin of the dispute are varied, making it hard for merchants to assess.

Loss of consumer trust

Relationships with valued clients can be damaged, even if the consumer is engaging in the chargeback process honestly, leading to the loss of future sales. In addition, high volumes of chargebacks can create a negative reputation for the merchant, leading to a decrease in consumer trust. Whether this is reflected on review forums, word of mouth, or in a Better Business Bureau rating, the public eventually finds out if a merchant has a chargeback problem. Merchants need to find a way to reduce instances of friendly fraud without losing valued customers.

Limited coverage from anti-fraud solutions

While anti-fraud solutions with chargeback guarantees offer to cover the cost of fraud chargebacks, they do little to prevent friendly fraud. Chargeback guarantees provided by anti-fraud solutions are typically limited to disputes lost under fraud reason codes, not service reason codes. This means a significant percentage of chargebacks continue to cause losses for merchants. Moreover, while these solutions cover the direct expense of some chargebacks, merchants are still responsible for chargeback fees and suffer from the reputational damage caused by chargebacks.

Refund abuse

To reduce instances of friendly fraud, many merchants implement a generous refund policy. A return incurs less expense than the various unrecovered costs associated with a chargeback. If a customer can easily return an item, overall chargeback volume decreases. However, there is a tradeoff between generous return policies and the occurrence of friendly fraud. While an open and robust return policy can reduce disputes, refund abuse can also increase. Refund fraud is its own $25.3 billion problem for merchants, particularly with card-not-present payment options. Customers can price switch, engage in price arbitrage, return stolen merchandise, and commit cross-retailer returns for illegal gain. A robust refund policy is a good step towards reducing friendly fraud, but it does not completely solve the problem of friendly fraud chargebacks.

Variability in the dispute process

Merchants also face the problem of variability in the dispute process, both between different financial institutions and within the same financial institution. This can make it difficult for merchants to navigate the process and effectively defend against chargebacks. Additionally, the process can be time-consuming and costly, as merchants may need to gather evidence and engage in lengthy communication with financial institutions to resolve disputes.

Overall, friendly fraud is a complex and challenging issue for merchants. While there are steps that merchants can take to reduce instances of friendly fraud, such as implementing a generous refund policy and using anti-fraud solutions, there are no easy solutions to the problem. Dealing with friendly fraud requires a combination of prevention efforts and effective dispute resolution to minimize