Friendly fraud occurs when cardholders dispute a legitimate purchase. And it’s actually anything but friendly.
Whether benign (the cardholder honestly believes they didn’t initiate a credit card transaction) or malicious (the customer is trying to get something for nothing), friendly fraud can have a serious effect on a merchant’s bottom line. Unfortunately, it’s a bigger problem than merchants might think.
Friendly fraud constitutes such a large percentage of overall credit card fraud that the FBI currently views it as the third-largest problem in e-commerce.
This type of fraud isn’t a victimless crime; in fact, it affects customers, merchants and cardholders alike. Here’s what happens when customers game the system —whether unintentionally or not — and how merchants can help stop the practice.
The Effect of Friendly Fraud on Merchants
Merchants bear much of the burden when it comes to friendly fraud. Not only is a merchant out the products or services when a customer fraudulently disputes a legitimate transaction, but they’re also out shipping costs, expensive chargeback costs, and the manpower needed to manage transaction disputes and chargebacks.
Customer loyalty is also affected by friendly fraud. Merchants may feel they need to appease longtime customers who have committed friendly fraud, believing it’s easier to write off the cost of an instance of friendly fraud rather than risk the negative social media response and reduced lifetime value of a customer. Unfortunately for merchants, accepting friendly fraud may serve to only encourage future bad behavior.
The rise in friendly fraud has another unintended consequence for merchants: a dramatic rise in false declines. Many e-commerce merchants use fraud detection solutions that count on reliable data coming in to make accurate decisions about the legitimacy of a transaction. But as friendly fraud rises and legitimate transactions with no red flags are increasingly coded as fraudulent, it wreaks havoc on fraud filters and simple fraud detection rules. Merchants’ systems begin believing that these legitimate transactions are actually fraudulent, skewing fraud models and increasing the false decline rate.
Even worse, once a customer experiences a false decline with a merchant, that customer is likely to take their business elsewhere, never to return — adding to a merchant’s financial losses.
How Friendly Fraud Affects Credit Card Issuers
Merchants aren’t the only ones to feel the effects of friendly fraud. Credit card issuers are also mindful of customer loyalty and don’t want to jeopardize that relationship by refusing to refund a disputed transaction amount — even if it’s a clear case of friendly fraud.
Current regulations also require an issuer to immediately credit cardholders the disputed transaction amount — even before an investigation into a dispute begins — causing short-term losses to an issuer’s cash flow.
Cardholders Are Impacted by Friendly Fraud, Too
Although it seems like consumers hold all the cards when it comes to friendly fraud, they’re ultimately affected also.
In innocent cases of friendly fraud, customers become frustrated when they have to go online or wait on the phone for a customer service agent to get more information about an unknown transaction. If they still don’t recognize the transaction and believe they’re a victim of fraud, customers may cancel their credit card altogether — leaving them in a financial lurch as they wait for a replacement card and scramble to update the recurring billing charges.
Even in the cases of hostile friendly fraud, the customer still loses. They may think they got something for nothing, but in the end, there’s still a cost. Merchants may have to increase product prices to compensate for the increased costs of false declines and chargebacks, while issuers may also need to raise their fees and interest rates to protect themselves against expected future losses.
What Merchants Can Do to Prevent Friendly Fraud
Because friendly fraud starts as a legitimate purchase, traditional fraud prevention tools are generally unable to detect and prevent any instances of friendly fraud. And that can make it easy for merchants to believe they’re powerless against preventing it. But by incorporating smart strategies like those below, merchants can minimize the impacts of friendly fraud on their business.
Keep Detailed Transaction Records
By keeping detailed purchase history information — like the details of when, where and how a purchase was delivered, activated or downloaded — merchants can offer customers the information needed to jog memories regarding the legitimacy of a transaction.
Create Household Profiles
Merchants can use historical data to create household profiles that include device IP addresses, purchasing habits and device types to prevent purchase disputes and increase the likelihood of winning a chargeback.
Make Return and Refund Policies Clear
Include links to easy-to-understand return and refund policies throughout websites, including on product pages, checkout pages, and order and delivery confirmations. Customers are less likely to initiate disputes when these policies are placed in obvious locations.
Implement a Robust Fraud Prevention Solution
Even merchants who implement these solutions may still find themselves the victim of friendly fraud. Some businesses may then try to implement simple fraud rules and basic fraud filters in an effort to prevent these transactions, but they just aren’t effective. Instead, merchants must implement a comprehensive fraud prevention solution that can protect them against the rising threat of card-not-present and friendly fraud.
The ClearSale solution uses an effective combination of trained human analysts with advanced machine learning to address the friendly fraud threat in real time. Not only can we help protect your business over the long term, but we also guarantee transactions 100% against fraudulent chargebacks. Contact a ClearSale analyst today to learn more.