When Customers Lie: How to Fight Friendly Fraud

Sometimes, a customer’s order doesn’t go as planned. But sometimes, the customer plans for things to go wrong. Either situation may result in a chargeback – but only one of these situations is fraud.

Legitimate chargebacks can occur when a customer honestly never receives their order. Or, maybe the product was defective, or the order wasn’t canceled as requested. The customer may try to resolve the issue with the merchant, but if that doesn’t work, the customer may decide file a transaction dispute with their credit card company.

But friendly fraud isn’t honest at all. It happens when a customer places a legitimate order, receives the merchandise and then files a dispute with their bank or credit card issuer with the dishonest intention of receiving an undeserved refund.

Because friendly fraud starts off as a legitimate purchase, it’s often difficult to prevent. But that shouldn’t stop merchants from recognizing friendly fraud as a serious threat and acting to minimize its effects on their business.

You can listen to the audio version of the article clicking on the player bellow. 

Why Do Customers File False Chargebacks?

While chargebacks were initially developed by card issuers to protect consumers, the chargeback process has become so easy that thieves are able to easily game the system. Friendly fraud can take place in a variety of ways, including when the customer:

• Places an order with the explicit intent to get free products
• Experiences buyer’s remorse and regrets a high-priced purchase
• Hides a purchase from a spouse or joint account holder
• Forgets to cancel a recurring purchase
• Misses the window to return a product
• Tries to lower their credit card balance

Some instances of friendly fraud also occur when consumers have a legitimate complaint but opt to not speak to the merchant first and instead take their complaint directly to the card issuer. Unfortunately, these customers don’t realize — or simply don’t care about — that this hurts the merchant.

The Staggering Cost of Friendly Fraud

Friendly fraud is becoming an increasingly larger portion of chargebacks. A whopping 86% of chargebacks are deemed fraudulent. Worse, 40% of customers who file one fraudulent chargeback will file another within 90 days.

The losses due to friendly fraud are significant. According to Visa, the financial impact of friendly fraud reached $11.8 billion in 2012 and is growing 41% annually. That cost reflects more than just the purchase price of the goods; merchant losses can include:

• Chargeback and processing fees
• Shipping fees
• Penalties
• Lost personnel time spent gathering documentation and researching claims

And the damage doesn’t stop there. If merchants accrue too many chargebacks, they risk losing their credit card merchant account, needing to pay for a high-risk account, or going out of business entirely.

All of this hits merchants hard — especially small businesses who don’t have the time, money or personnel to defend themselves against fraudulent claims.

8 Steps for Preventing Friendly Fraud

Not only is defending against chargebacks tedious and expensive, it’s also rarely successful: Reports estimate that merchants prevail only 20% to 30% of the time. Even if merchants do win a dispute, they are still required to pay fees and penalties.

That’s why it’s critical for merchants to take steps like these to prevent friendly fraud from happening in the first place:

1. Maintain good customer relationships. Encourage customers to call merchants before filing chargebacks. This contact gives merchants the opportunity to make the transaction right.
2. Send order confirmations. Each customer should receive an email confirmation for their purchases that includes the terms of the purchase and return policy.
3. Require card verification values (CVV). These three- or four-digit codes increase the likelihood that the customer has the physical card in hand, not just the number.
4. Require signatures at delivery. Merchants should require recipients to sign for deliveries, especially high-value orders, making it harder for a customer to deny receipt.
5. Make getting in touch easy. Merchants should offer multiple ways for customers to get in touch with them — phone numbers, email addresses, social media pages — and train their customer service team to handle complaints efficiently.
6. Ensure clarity on credit card statements. Consider the business name that displays on a customer’s credit card statement. Ensure the description won’t confuse customers; at the very least, let customers know what name they should expect to see on statements.
7. Keep customers informed. From the time the order is placed to when customers receive satisfaction surveys, merchants should stay in contact. Send order updates with shipping and tracking information so a customer knows where their merchandise is every step of the way.
8. Communicate clearly. Ensure that cancellation and return policies are clearly stated on the website, receipts and emails.

Even merchants who closely follow these guidelines may still find themselves the victim of friendly fraud. That’s why merchants must implement a comprehensive solution that can protect against the rising threat of card-not-present and friendly fraud.

Contact a ClearSale analyst today to learn how our guaranteed protection covers your business 100% against any fraudulent transaction that results in a chargeback.