Ecommerce businesses around the world are expected to face losses totalling $48 billion due to online payment fraud in 2023. In 2021, the most common type of fraud encountered by online merchants was friendly fraud, with 8 in 10 merchants seeing an increase in friendly fraud in the same year. It's therefore essential to understand the concept of friendly fraud and how it can impact your business, so you can prevent financial losses and operational burden.
In this article, we'll take you through the basics and show you how to prevent friendly fraud in your organisation.
What is friendly fraud?
To fully understand friendly fraud — sometimes referred to as chargeback fraud — it’s important to understand what chargebacks are. A chargeback is the reversal of a debit or credit card payment. Unlike with normal refunds, where the customer is the party requesting a refund, in the case of a chargeback, it’s the customer’s bank that takes the money on the customer’s behalf.
Specifically, friendly fraud is a type of ecommerce fraud. It happens when a customer purchases something, receives the item or service, and then falsely disputes the charge with the issuing bank or credit card company, fraudulently claiming they did not authorise the payment. The issuing bank then submits a chargeback on behalf of the customer.
Some consumers might ask for money to be refunded by their card issuer because of a payment error or an unauthorised charge made by a company. However, friendly fraud occurs when the cardholder receives a charge they did actually authorise, in order to get their money back and also benefit from the purchase without having to pay for it.
For example, a customer might demand a refund for an item they purchased by claiming they never received it. To dispute the claim, the company that sold the product has to prove that they successfully delivered the item to the customer.
Friendly fraud has become increasingly common in recent years due to the rise in digital-first shopping habits. MasterCard estimated that there would be 615 million chargebacks requested in 2021. It’s also estimated that 86% of chargebacks could be fraudulent, meaning businesses collectively face hundreds of millions of fraudulent chargebacks every year.
Types of friendly fraud
Several types of friendly fraud can impact businesses.
Unintentional friendly fraud
This form of friendly fraud occurs when a customer makes an innocent mistake and disputes a payment because they don't recognise the payment or don't remember making it. For instance, if your billing descriptor is unclear or does not include a business name, consumers may not recognise it on their statement and may dispute the payment. In these cases, it's usually enough to provide proof of payment and explain how the customer has used your services to get the disputed charge reversed.
Some customers might not understand how they should get a refund for an item they want to return and turn directly to their bank rather than the company they purchased from. To prevent this type of friendly fraud, ensure that your store's policies on refunds and returns are clear, easy to understand, and accessible.
Unauthorised card use
Another type of friendly fraud involves someone using a card without the consent of the account holder. A child or family member might make a payment on a video game or in an application using their parent's card details that the platform has saved.
Microtransactions in video games are especially prone to friendly fraud. For instance, many free-to-play mobile games offer the opportunity to purchase coins or gems that can be used to upgrade characters, buy new weapons, or purchase special abilities. Someone may make an unintentional in-game purchase and then later dispute the payment.
Malicious intent-friendly fraud occurs when a customer purchases an item or a service from your business and then later intentionally disputes the charge to avoid paying. When someone knowingly gives false information for financial gain, it's called first-party fraud.
This kind of friendly fraud is particularly difficult to prevent, as it's difficult to distinguish between fraudsters and customers who make honest mistakes.
What impact can friendly fraud have on a business?
Chargeback fraud can have several negative consequences for merchants, including financial losses. One of the most immediate impacts is the loss of profits due to customers disputing legitimate transactions. This can be especially damaging for small businesses that may not have the resources to absorb such losses.
Increased costs associated with chargeback fees, investigations, and customer service can also cause concern for merchants. Chargeback fees can add up quickly, and investigations and customer service can be resource-intensive. These costs can strain the business's finances and may be difficult to recoup.
Plus, card schemes (like Visa and Mastercard) monitor your chargeback ratio. If that ratio is too high (Visa’s threshold is 0.65% whereas Mastercard’s is 1%), you may be placed on their monitoring programme. Once you’re on a programme, you can be charged monthly fines and fees, until your chargeback ratio falls below the relevant threshold.
And fighting chargebacks, using a process called ‘chargeback reversal’ can be effective but time consuming. Businesses need to gather evidence that the chargeback claim is illegitimate and submit this evidence within strict time frames set out by the issuing banks.
Friendly fraud prevention
There are several strategies that businesses can use to reduce instances of friendly fraud. By taking proactive steps to prevent and reduce friendly fraud, businesses can protect themselves from financial losses. But before implementing any of these strategies, ensure your own operations are in order. Look out for evidence of your business:
failing to deliver the goods or services ordered
providing goods that are defective or not as described
charging the customer the wrong amount or duplicating the payment
If any of these happen regularly, your business will likely suffer more legitimate chargebacks. Fixing these issues will make it easier to reduce the overall number of chargebacks and therefore easier to spot potential illegitimate chargebacks.
Methods for reducing instances of friendly fraud include:
Upgrade your customer communication
Prevent chargeback disputes due to confusion or misunderstanding on the part of the customer by making sure that customers are aware of the details of their purchase. Send confirmation emails with every purchase, including how much and when you will charge them. If you run a subscription service that charges the customer monthly, send reminder emails to ensure they are aware of the payment.
Additionally, make sure that your billing descriptor is clear and includes a recognisable business name. This will help customers identify charges on their accounts and ensure they don't mistakenly dispute legitimate payments.
And finally, a clear and simple way to speak directly to customer support can help avoid chargebacks, because support agents can help resolve issues that a frustrated customer might otherwise request a chargeback for.
Publish clear return and refund policies
By providing customers with detailed information about your return policy and process for returns, you can help them make more informed decisions when it comes to disputing charges or making invalid claims. Publish easy-to-understand policies along with FAQs on your website.
Utilise open banking payments
Open banking payments — often called instant bank transfers at checkout — allow customers to make payments quickly and easily without entering their card details. There is a reduced risk of unauthorised payments and fraud, thanks to embedded strong customer authentication (SCA) and pre-populated payment details. Existing open banking SCA journeys are significantly shorter and more convenient than the SCA journeys for some card payments. Additionally, open banking does not include a chargeback mechanism as there is no card network involved in the buying experience.
Read more in our guide to open banking.