2024 CODiE Finalist

Friendly Fraud

What are the Types of Friendly Fraud?

There are several scenarios for friendly fraud:

Family or friends: This refers to a friend or family member of the cardholder making a purchase with the cardholder’s card, which the cardholder later disputes without realizing the purchase was legitimate.

Impulse buying: In this scenario, the cardholder makes an impulse purchase and, later regretting it, tries to reverse the transaction through a chargeback.

Product disputes: The cardholder might dispute a charge if they are dissatisfied with the product or service received but don’t attempt to resolve the issue with the merchant first.

Unauthorized Children: In cases involving shared household accounts, children or teenagers may make purchases without permission, leading to disputes when the cardholder discovers the charges.

What is Friendly Fraud vs Chargeback Fraud?

Friendly fraud and chargeback fraud are two distinct forms of payment disputes, both of which can result in merchants experiencing financial losses and reputation damage. Here’s an explanation of each:

Friendly Fraud

  • Definition: Friendly fraud, also known as “first-party fraud” or “cyber shoplifting,” occurs when a legitimate cardholder initiates a chargeback on a valid transaction. It is not initiated by a malicious actor but is usually the result of misunderstandings, forgetfulness, or disputes.
  • Common Causes:
    • Friendly fraud can result from situations where a cardholder:
      • Forgets or doesn’t recognize a legitimate purchase on their credit card statement.
      • Believes the product or service did not meet their expectations.
      • Was unsatisfied with customer service and decided to initiate a chargeback.
      • Wants to avoid the hassle of returning a product for a refund.
  • Risk to Merchants: Merchants can lose revenue and incur chargeback fees when friendly fraud occurs. It can also negatively impact their merchant account if chargeback rates exceed acceptable thresholds.

Chargeback Fraud (or True Fraud)

  • Definition: Chargeback fraud, also known as “third-party fraud,” is a malicious act in which a fraudster obtains another person’s credit card information, makes unauthorized purchases, and then initiates chargebacks to reverse the transactions, effectively stealing goods or services.
  • Common Causes: Chargeback fraud is driven by criminal intent and can involve actions such as:
    • Stolen credit card information through data breaches or phishing.
    • Unauthorized card use for online shopping or making reservations.
    • Deliberate and fraudulent attempts to obtain products or services without payment.
  • Risk to Merchants: Chargeback fraud can result in financial losses for merchants. They may lose the value of the goods or services, incur chargeback fees, and be penalized for high chargeback rates. Additionally, their reputation may suffer as a result of the dispute.

The key difference between the two lies in the intent behind the dispute. Friendly fraud involves legitimate cardholders who may dispute charges for various reasons, while chargeback fraud is a deliberate act of fraudulence, often involving stolen or unauthorized card information. Merchants often need to follow different processes to address these two types of disputes and should implement strategies to minimize both friendly and chargeback fraud.

Friendly Fraud VS Chargeback Fraud

How Do You Minimize Friendly Fraud?

Here are several strategies to minimize friendly fraud:

Clear Billing Descriptors: Ensure that your billing descriptors are clear and recognizable on customer credit card statements. This can help reduce cases where cardholders don’t recognize a transaction and mistakenly initiate a chargeback.

Prompt Customer Communication: Send order confirmation emails and receipts immediately after a purchase. Include information about the purchase, contact details, and a clear refund policy. This can help prevent confusion and misunderstandings.

Customer-Friendly Return Policy: Offer a straightforward and customer-friendly return or refund policy. Make it easy for customers to return products or seek refunds when they are dissatisfied rather than resorting to chargebacks.

Responsive Customer Support: Provide accessible and responsive customer support to address customer inquiries and concerns promptly. Satisfied customers are less likely to resort to chargebacks.

Transparent and Detailed Product Descriptions: Provide detailed and accurate product descriptions, including images, specifications, and any potential limitations. This helps customers make informed decisions and reduces the likelihood of disputes.

Additional Communication Channels: Make it easy for customers to contact you through various channels, such as phone, email, or chat, to resolve any issues or disputes quickly.

Secure Payment Processing: Implement strong security measures to protect customer payment information and prevent fraudulent transactions, which can lead to chargebacks.

Payment Dispute Resolution: Establish a clear internal process for addressing payment disputes. Train staff to handle disputes professionally, seeking resolution before customers escalate to chargebacks.

Record Keeping: Maintain thorough records of customer interactions, transactions, and order details. This documentation can be useful in addressing chargeback disputes.

Chargeback Alerts: Utilize chargeback alert services that notify you when a customer initiates a chargeback. This early notification allows you to respond promptly and contest unwarranted disputes.

Behavior Analysis: Analyze customer behavior and transaction patterns to detect potential indicators of friendly fraud. Unusual or suspicious activity can be flagged for further investigation.

Payment Authentication: Implement strong customer authentication methods during the checkout process, such as two-factor authentication (2FA) or cardholder verification, to reduce unauthorized transactions.

Fulfillment Tracking: Use shipment tracking and delivery confirmation to provide evidence of product delivery. This can be valuable when disputing chargebacks related to delivery issues.

Educational Materials: Provide customers with educational materials that explain how chargebacks work, the associated costs, and when it’s appropriate to contact your customer support team instead.

Data Analytics: Use data analytics to identify trends in customer disputes. Identify recurring issues and address them proactively to reduce friendly fraud incidents.

By implementing these strategies, you can reduce the occurrence of friendly fraud and enhance your customer relationships. It’s important to find a balance between minimizing friendly fraud and providing excellent customer service to maintain a positive reputation and retain loyal customers.

How Should You Respond to Friendly Fraud?

Responding to friendly fraud effectively is crucial to mitigate revenue loss and maintain positive customer relationships.

Here’s a step-by-step guide on how to respond to friendly fraud:

  1. Identify the Chargeback Reason: Review the chargeback reason code provided by the issuing bank or payment processor. Understanding the specific reason for the dispute will help you tailor your response.

  2. Gather Transaction Information: Collect all transaction details, including the purchase date, order number, customer details, product or service information, and any communication records (emails, call logs, chat transcripts, etc.).

  3. Review Customer History: Check the customer’s history with your business, including past purchases, interactions, and any previous chargebacks. This can help you determine if the dispute is a one-time occurrence or part of a pattern.

  4. Evaluate Validity: Assess the validity of the customer’s claim. Determine if the customer’s reasons for initiating the chargeback are valid and whether the chargeback was warranted.

  5. Contact the Customer: Reach out to the customer to discuss the chargeback. Be polite and understanding, seeking to resolve the issue amicably. Provide additional information, clarify any misunderstandings, and offer to address their concerns.

  6. Refund or Reship Products: If the customer’s dispute is valid, consider offering a refund or reshipping the product or service to rectify the issue. This can often lead to chargebacks being reversed.

  7. Document the Interaction: Keep detailed records of all interactions with the customer regarding the chargeback, including any offers, resolutions, or agreements reached.

  8. Provide Evidence: Compile evidence to support your case. This may include order confirmations, delivery tracking information, communication records, or signed delivery receipts. Be prepared to present this evidence in case you need to contest the chargeback.

  9. Contact Your Payment Processor: Reach out to your payment processor to inform them of the situation and provide any supporting evidence. Some payment processors may allow you to provide evidence and contest the chargeback directly through their system.

  10. Respond to the Chargeback: If necessary, formally respond to the chargeback through your payment processor’s platform. Include all relevant evidence, transaction details, and any communication with the customer. Be concise and clear in your response.

  11. Monitor the Chargeback Process: Keep track of the chargeback resolution process. The issuing bank will review your response and evidence before reaching a decision.

  12. Escalate If Needed: If the chargeback is not resolved in your favor, you may have the option to appeal the decision or escalate the case to a higher level, depending on the policies of your payment processor.

  13. Learn from the Experience: Use the incident as an opportunity to learn and improve your business processes. Identify any patterns of friendly fraud and develop strategies to minimize future occurrences.

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