80% of Chargebacks Due to Friendly Fraud: Unveiling What It Is and Its Business Impact

For an eCommerce merchant navigating the digital marketplace is common practice. But, below the surface, challenges like friendly fraud lurk, ready to disrupt the calm. Known for transforming legitimate purchases into controversial disputes, friendly fraud often blurs the lines between honest mistakes and deliberate deceit. According to Chargeflow’s recent State of Chargebacks Report,  friendly fraud accounts for a staggering 8 out of 10 chargebacks, which boils down to the fact that the greatest threat to chargebacks is related to customer-related fraud. 

As we unravel the complexities of friendly fraud, we’ll clearly outline what it entails and how it differs from other fraud types. We’ll explore the common triggers that lead customers to initiate chargebacks and investigate the reasons behind them. More crucially, we’ll equip you with strategies to identify and mitigate the risks associated with friendly fraud, safeguarding your business against this hidden threat. 

Defining Friendly Fraud

As we discussed, friendly fraud emerges as this challenge amidst the flow of eCommerce transactions. But it is important to fully understand it's a more detailed examination to understand its implications. 

What exactly is friendly fraud? 

Friendly fraud involves customers, who after purchasing with their credit card dispute the charges through their band without a valid reason. Typical occurrences are often due to misunderstandings or unintentional abuse of the chargeback process, making it a unique adversary for merchants. Let’s take a closer look at the distinctive features of friendly fraud, highlighting these instances of accidental or deceptive approaches. 

Common Triggers for Chargebacks Due to Friendly Fraud

Accidental Nature

There are numerous ways friendly fraud can occur unintentionally and emerge out of miscommunication and simple mistakes, they are generally characterized by the following:

‍Unrecognized Transactions: A credit card statement may not always list a merchant’s name as the name they go by, and therefore, the customer might miss a transaction if they forget about the purchase. Additionally, if it is a name they don’t recognize this triggers a call to their bank to initiate a chargeback. 

‍Family Misunderstandings: Family members, especially in households where credit card usage is shared, might accidentally confuse one another’s purchase with fraud, unintentionally leading to chargebacks when the primary cardholder doesn’t recognize a transaction.

‍Subscription Overlook: Customers often forget to cancel their subscriptions or free trials, so they can frequently be surprised by charges they may mistakenly dispute as fraud. 

Deceptive Nature

On the darker side, friendly fraud can also result from the customer’s purposeful effort to navigate the chargeback system to take advantage of an unintentional or deliberate misunderstanding. Here’s a look at some of the most common ways in which friendly fraud can take on a deceptive nature. 

‍Regret or Buyer’s Remorse:  A buyer might have a change of heart after a spontaneous or impulsive purchase, opting to dispute the charge instead of returning the item as they may be required to do by the merchant’s return policy.

‍Exploiting Return Policies: A customer might claim a charge was incorrect because an item was never received, not as described, or was defective, though they’re fully aware these negative descriptors aren’t true, seeking to avoid return shipping charges or restocking fees they will otherwise incur, having expected that the merchant won’t issue a chargeback in response. 

‍Seeking Unjust Enrichment: Despite using and benefiting from the product or service, the customer might exploit these less-clear-cut cases by filing a chargeback to get the product or service for free, deceptively manipulating the system to their gain.

The Impact of Friendly Fraud on eCommerce

Financial Consequences: One of the most significant consequences of friendly fraud is the financial impact merchants entail. When a fraudulent chargeback is issued against a merchant, they lose the value of the goods or services sold and the associated processing fees. While many regard filing a chargeback as a victimless crime, this is especially so with the Gen Z generation, who admitted to filing a fraud dispute, despite being satisfied with their purchase.  

Furthermore, friendly fraud according to Mastercard, is said to be costing the industry over $132 billion a year. This does not include additional losses that we mentioned such as loss of goods or services that are refunded. 

Operational Challenges: When it comes to the operational impact of friendly fraud this goes far beyond financial losses. Here we need to take into account the time and resources that were spent on disputing chargebacks which isn’t an easy process. With the increased trend of friendly fraud, many businesses have been forced to reevaluate their fraud prevention and chargeback management strategies to combat these disputes. 

‍Reputational Damage: As an eCommerce merchant your reputation can make or break the success of your business. As an eCommerce merchant, your reputation is at risk if customers see a high volume of chargebacks on your account, leading them to assume you aren’t trustworthy or your products or services are low-quality, this type of thinking can lead to a decrease in sales and loss of customers. Additionally, this territory can come with negative reviews and customer feedback if they feel they were unfairly treated or their chargeback mishandled. This negative feedback can cause further damage to your business’s reputation and overall business success. 

Strategies for Preventing and Managing Friendly Fraud

To effectively manage and mitigate friendly fraud, businesses need to adopt a structured approach to help build a robust defense against friendly fraud. Here are recommended strategies that can help you set up a structured process: 

1. Use Clear Billing Descriptors: Ensure your billing descriptors on customer statements are crystal clear and understandable. This can avoid confusion and reduce the possibility of unnecessary disputes, a common cause of friendly fraud.
2. Maintain Detailed Transaction Records: It is essential to keep comprehensive records of all communications, purchase details, and delivery specifications. These details are essential for disputing chargebacks and identifying potential friendly fraud incidents. 
3. Customer Education Initiatives: Utilize an automated communication platform to educate customers about the chargeback process. This will ensure a clear line of messaging on transaction receipts and automated follow-up emails which will aid in reducing instances of friendly fraud. 
4. Customer Experience Initiatives: In many instances friendly fraud is often the result of unintentional or non-malicious actions by customers, making it crucial to strengthen customer communication, make transaction deals transparent, and refine refund policies. Resolving customer issues before they escalate into disputes is a proactive approach to reducing the chances of friendly fraud. 
5. Automated Fraud Detection: Implement an automated fraud detection system that is powered by machine learning and AI. This will help you identify fraud in the pre-transaction stage saving you a lot of trouble in the future. 
6. Chargeback Management Automation: Because friendly fraud is hard to detect, chargeback management tools are particularly effective in this scenario. Automating the chargeback management process is also a game-changer, helping you respond quickly to chargeback claims, identify common reasons for chargebacks, and increase your chances of winning disputes. Chargeback Management solutions like Chargeflow can help ease this administrative burden on businesses and allow for real-time response and dispute resolution.
   

The Final Step: Fortifying Against Friendly Fraud

As we’ve uncovered the basics of understanding the nature of friendly fraud, its triggers, implications, as well as its deceptive side, all of this is crucial for eCommerce merchants to successfully combat friendly fraud. While we gave our recommended strategies to help your business significantly mitigate the risks associated with friendly fraud, the battle doesn’t end there. With the constantly evolving landscape of online transactions and the advancing pace it's taking, as well as the lurking dangers of those trying to exploit it, what is the next step in this battle? Implementing cutting-edge technology to help you fight against friendly fraud. 

Stay tuned for our upcoming post which will delve into technological solutions that can help merchants like you bring a robust and intelligent arsenal to help you detect, manage, and prevent these deceptive disputes.

In the meantime, if you'd like to speak to one of our experts, please do not hesitate to reach out and we'll answer all your questions.

Stay informed, stay prepared, and let's turn the tide against friendly fraud together.

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