What is Chargeback Fraud, AKA Friendly Fraud?

May 17, 2023

Fraudulent Chargebacks: The Silent Scam on E-commerce

The American Dream has long fueled entrepreneurial aspirations, promising anyone can be what they want to be. With the rise of e-commerce, this dream is perceived to be more achievable. However, merchants face challenges that go unnoticed, such as different types of fraud like chargeback fraud and friendly fraud.

Friendly Fraud: A Bitter Pill to Swallow

Take, for instance, entrepreneurs Jim and Susie Miller, who enter the world of e-commerce, only to encounter the harsh realities of friendly fraud. They establish a unique online retail presence, gradually building a loyal clientele and successfully turning a profit.

However, friendly fraud, a scam where customers unfairly take advantage of the dispute process, starts to erode their gains, leading to fraudulent chargebacks. These deceptive actions harm their business significantly when their credit card payments are withheld by their card processor due to a few dishonest customers committing friendly fraud. Eventually, their accounts are closed by their issuing banks.

Affiliate Marketing and Chargeback Fee: A Double-edged Sword

The Millers, like many high-risk merchant accounts, are lured by the potential growth affiliate marketing can bring. But without expertise in affiliate marketing, they inadvertently attract unqualified sales leading to a high chargeback fee.

Soon their credit card processor informs them that no cash will be deposited into the business’ bank account. Additionally, their past week’s earnings will remain in reserves. All because a couple of dishonest clients registered chargebacks. Afterward, the bank closes their accounts entirely.

Preventing Friendly Fraud and Chargeback Fraud: The Path to Sustainable Growth

Undeterred, the savvy Millers quickly learn from their mistakes and incorporate new measures to prevent friendly fraud and chargeback fraud. But their chargebacks spike again due to another round of friendly fraud.

Friendly fraud chargeback is a silent scam in the world of online commerce. It’s when a customer deceptively claims a card-not-present transaction as unauthorized. Merchants often find themselves stuck in the chargeback process, having to dispute illegitimate or friendly fraud chargebacks, of which only 25% are disputed, according to experts.

The Customer Is Not Always Right

The growth of new trade channels and the lingering belief that the “customer is always right” have emboldened customers, leading to an increase in fraudulent chargebacks, comparable to internet shoplifting. Based on Visa’s report, friendly fraud led to $11.8 billion in chargebacks in 2012 alone, thrice the losses caused by identity theft.

Strategies to Fight Back

To prevent chargeback fraud and secure growth, merchants need to employ best practices such as:

• Providing high-quality goods or services at fair prices.
• Offering extended customer service hours.
• Using clear credit card descriptors.
• Keeping delivery receipts for concrete products.
• Clearly stating refund and cancellation policies.
• Ensuring quick response times to customer service issues.

Moreover, to prevent friendly fraud and monitor identity theft, they can:

• Regularly review traffic.
• Survey customers.
• Utilize fraud detection software.
• Take advantage of pre-notification alerts.
• Dispute fraudulent chargebacks, either in-house or through a chargeback fraud management company.

With the increasing instances of friendly fraud and chargeback fraud, merchants must take proactive measures to protect themselves. It’s a challenging task to remain afloat in the e-commerce business, but preventing scams through effective chargeback process management is a critical step towards sustainable and secure growth.