What is Friendly Fraud and How Do You Prevent It?

What is friendly fraud?

Friendly fraud is when a customer commits fraud by (accidentally or purposefully) requesting money back from a business for a purchase without a legitimate reason. 

There are two approaches to committing friendly fraud:

• Chargeback fraud: When a customer files an illegitimate chargeback. For instance, they buy something from a business and initiate a chargeback without a legitimate reason.
• Refund abuse: When a customer buys a product, claims they haven’t received it (even though they have), and gets their money back.

Friendly fraud vs chargeback fraud

Chargeback fraud is a type of friendly fraud when a customer files an illegitimate chargeback. A chargeback is when a customer disputes a charge on their account statement after completing a card payment. Although chargebacks offer an easy way to reverse suspicious transactions and protect cardholders from fraud, they're often used to commit friendly fraud. 75% of chargebacks are due to friendly fraud, and most happen for card-on-file transactions.

When a customer files a chargeback, the payment is reversed. Once approved, the customer receives the transaction amount back in full. Although businesses have a chance to defend themselves if they disagree with the chargeback claim, chargebacks put their revenue at risk, especially as friendly fraud increases. 

Types of friendly fraud;

There are multiple reasons why friendly fraud may occur, but not all of them are malicious. Below, you can find the most common reasons...

• Accidental friendly fraud/confused customer

Accidental friendly fraud is when a customer makes a purchase and forgets about it or doesn't recognize it on their bank statement. If this happens, they might assume they were charged for something they didn't buy and initiate a chargeback. This is quite common for subscription businesses. Customers sometimes sign up for subscriptions and forget about it. Then, a year later when it’s renewed they don't recognize the transaction and issue a chargeback. 

• Dissatisfied customer

Customers have certain expectations when they buy a product based on how the business portrays it. If the product doesn’t meet these expectations, they might feel dissatisfied. In some cases, they might even feel tricked by the company which can result in the customer initiating a chargeback rather than a return. One example of this is if a customer buys a clothing item online that doesn’t quite match the description of the product on the website.

• Family fraud

Family fraud is when one family member buys something without the knowledge of another, and the second family member initiates a chargeback. One example is when a child takes their parent's credit card and buys something without their knowledge. This could for instance be an in-app purchase for a video game. Parents can often solve this by contacting the business. However, if the parent doesn't have the full context, they might initiate a chargeback and be accountable for friendly fraud.

How to prevent friendly fraud

As long as there is the option to file chargebacks, there will always be the possibility of friendly fraud. Even though eliminating friendly fraud completely can be difficult, there are some things you can do to reduce its impact on your revenue. These include:

Prevent fraud

• Use authentication tools like Address Verification Service (AVS), card security codes (CVV), and 3D Secure 2. 3D Secure allows businesses to protect themselves from fraudulent chargebacks through a ‘’liability shift’’ from the business to the card issuer
• Build a risk system that can recognize patterns and identify friendly fraudsters, for instance shoppers that have initiated multiple disputes and chargebacks across different cards and identities
• Blocked lists: Create a list of blocked customers that pose a threat to your business

Clear communication 

• This is especially beneficial for confused customers and includes: 25% of disputes could be prevented with more details.
• Ensure the merchant description on the bank statement is clear, accurate, and matches the customer-facing one
• Respond to any customer questions quickly
• Alert your customers if a product is out of stock as soon as possible
• Provide detailed product descriptions on your website

Easy returns

• Refund customers as quickly as possible
• Provide a clear return policy
• Make sure your contact information is accessible so customers can contact you in case of doubt

Match expectations

• Ensure your product matches your customer's expectations to avoid dissatisfied customers
• Set expectations when it comes to delivery time and keep your customers updated. Let your customers know if there are delays
• Compensate your customers proactively if you can't deliver on time
• Track your goods and ask your customer to sign when they receive the package for extra security

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