What is Chargeback Fraud, AKA Friendly Fraud?

March 4, 2023 | High Risk Merchant Account | Dustin

Chargeback fraud and friendly fraud are scams by consumers who take advantage of online stores. As this dishonest attitude grows, it damages domestic businesses.  The American Dream has long since powered the ambitions of citizens with the thought that you can be whatever you want to be.

Some may argue that with the increase of ecommerce, the American dream is now more achievable than ever before. But one thing that is never accounted for in this measurement of success are the entities that work against you. Scammers.

Confronting Friendly Fraud

Let’s set up a scenario where we have a set of entrepreneurs who see friendly fraud first hand. Let’s call them Jim and Susie Miller, and they break into the ecommerce’s seemingly lowered barriers of entry.

As savvy entrepreneurs, they create a distinctive online retail presence and their brand is well represented. Slowly, they gain a strong clientele of people who shop with them. In time, they have a profitable online business.

Friendly Fraud Chargebacks

Friendly fraud can lead to chargebacks. And with different marketing avenues, these can be detrimental. While the guarantee of growth with affiliate marketing entices the Millers, what they do not know is that this kind of advertising — if not closely monitored — can attract higher levels of unqualified sales and resultant chargebacks.

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.

Fraud and Hedging Risk

Many high risk merchant accounts seek customers through affiliate marketing. The problem is that merchants going into this arena oftentimes lack expertise in the affiliate area.

Without understanding the mechanisms of the technique, one can quickly fall victim to affiliate fraud, and the outcome is excessive chargebacks and the loss of credit card providers.

Fortunately, in this hypothetical case, the Millers are very clever business people who quickly learn from their mistakes and re-invest in their business with new mechanisms to ensure such fraud can’t hurt them again.

After completing this whole process, I’m sure you can suspect that they are shocked when their chargebacks spike again.

Chargeback Fraud, Friendly Fraud, and the Silent Scam

This time, it was a new kind of chargeback fraud that emerges – friendly fraud chargeback. It’s a scam retailers never see coming. Friendly fraud is a type of chargeback filed by a customer who tries to get something for nothing. They call their credit card provider and claim a card-not-present transaction was fraudulent and unauthorized.

Estimates from experts say that merchants dispute only 25 percent of all illegitimate or friendly fraud chargebacks. And chargeback fraud has exploded in the last several decades

Friendly Fraud Scams

Scams have bad consequences for merchants. They penalize merchants who don’t have the time or resources to defend themselves by combating these kinds of chargeback claims. Based on Visa, favorable fraud accounted for $11.8 billion in chargebacks in 2012 alone — six times the estimated $2 billion in reductions caused by identity theft.

The Customer Isn’t Always Right

Countless retailers have fallen prey to chargebacks from friendly fraud, despite every intention of growing their companies the ideal way. The development of new trade channels and the classic “customer is always right” adage has empowered consumers.

More than ever, they are filing chargebacks and benefiting from what is comparable to internet shoplifting. Unfortunately, the consequences will continue to be lenient until more merchants take a stand.

The only defense against chargeback fraud and friendly fraud chargebacks is a fantastic offense.

Employ Best Practices To Avoid Returns

• Offer extended service hours
• Use crystal clear charge card descriptors
• Promote high-quality products at fair prices
• Keep delivery receipts for concrete products
• Specify refund and cancellation policies clearly
• Deliver fast response times for customer service issues

Establish Policies For Monitoring Identity Theft

• Review traffic
• Survey customers
• Utilize fraud detection software
• Take advantage of pre-notification alarms
• Dispute illegitimate chargebacks, either in-house or through a chargeback fraud management company.

Merchants have to struggle to remain afloat in this business. And preventing scams through chargebacks is a key step toward sustainable, secure growth.