Even though the words “friendly” and “fraud” don’t seem to go together, friendly credit card fraud is an actual term, and it is in fact a major problem for a majority of online merchants. Friendly fraud occurs when a consumer fraudulently reports to their card issuer or financial institution that a charge on their credit card is unauthorized or not legitimate. In such a scenario, the consumer is usually refunded the money instantly and leaves the merchant on the hook for the cash.
What is Friendly Fraud?
As mentioned above, friendly fraud happens when a legitimate customer buys something using their credit card. But after the purchase has been made, they dispute the charges with the issuing bank rather than returning or exchanging an item or examining the charges to ensure that they are legitimate.
In some cases, the consumer has nefarious intent to dispute the charges and keep the services/goods. However, generally, customers contact their credit card service providers to request more information about the transaction simply because they don’t recognize a billing descriptor, or they don’t have the memory of such a purchase. The consumers conclude that something malicious is going on with their credit card number.
Friendly fraud is a problem for online merchants, and it is way more common than other types of fraud. According to statistics, only 10% of disputes are legitimate, 20% are criminal fraud, and 70% of chargebacks are usually friendly fraud. One thing to note is that not all friendly fraud is the same and within this very high percentage, there may be various reasons why this type of fraud occurs.
Types of Friendly Credit Card Fraud
Following are the different types of friendly credit card fraud:
- Accidental Friendly Fraud: A consumer buys something using their credit card, but later fails to recognize it because of limited information on a bank statement.
- Intentional Friendly Fraud: A consumer buys something using their credit card and recognizes the purchase. However, they still contact their credit card issuer and claim that the transaction was unauthorized.
- Shared Card Fraud: Many consumers share a card with their family members. Because of this, if one family member buys something using the card and doesn’t inform the other, it can result in friendly fraud.
- Merchant Error: A merchant does not provide enough support to avoid a chargeback. This may include poor customer services, limited merchant descriptors on a bank statement, and more.
- In-flight Chargeback: When a business issues a refund, it can take several days or even weeks to process the refund. But the consumer expects the refund to be instant. When the refund process takes a while, the consumer becomes impatient and calls the bank. In such a scenario, the refund sometimes occurs twice.
- Policy Abuse Fraud: This is a type of friendly fraud that lets consumers return items within a certain time limit without having to provide a reason. It doesn’t usually limit the number of times a refund is requested, or the item is returned. However, many companies take action if they feel that the consumer is abusing the policy.
Merchants Shoulder The Financial Liability
Whether or not the chargeback or friendly fraud is intentional, merchants end up losing billions. According to an estimate by Visa, more than $11 billion was lost to friendly fraud in the year 2012. The problem is more severe for online merchants, as they typically cannot prove that a charge was legitimate. Because of this, the consumer usually wins.
Apart from this, merchants with over 1% of their charges reversed as chargebacks are generally at the risk of being shut down by MasterCard or Visa – which can mean going out of business entirely. Because of these reasons, businesses must and do fight friendly fraud in a number of ways.
What Can Be Done About it?
Friendly fraud is very difficult to prove. The best thing merchants can do to avoid it and protect themselves is to recognize the potential friendly fraud. There are certain types of transactions in online space that are more susceptible to friendly fraud as compared to others. As a merchant, it is recommended that you keep an eye on the following:
- Unusually Large Orders: Bulk orders are unusually attractive to fraudsters. Bulk orders generally contain a large number of items or a large dollar amount.
- International Orders: Friendly fraud generally occurs thrice as more frequently on international orders as opposed to local orders.
- Order Risk: For small online merchants and businesses, there are certain orders that don’t really make sense. It may vary from one retailer to another, but if the type or scope appears fishy, it merits further verification.
- Chargeback Alerts: Merchants with higher ratio of chargebacks ( Over 1% of Sales Volume ) should consider adding Chargeback Alerts to their merchant account, to Stop Chargebacks, before they hit their account. Click the link for more information on Chargeback Alerts, to save your merchant account from termination.
Consult Your Payment Processor’s Risk Department
In conclusion, friendly credit card fraud is the bane of online merchants. So, it’s important to take proactive measures to avoid them. The above-listed are some ways to protect your business from friendly fraud and prevent it from occurring in the first place. It is highly recommended that you consult your payment processor on a regular basis for advice on current best practices and security updates so that you can stay one step ahead of cybercriminals.
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About The Author
Mark Sands, the co-founder of High Risk Merchant Account LLC, is an authoritative expert in the high-risk merchant account space. Mark has decades of experience in the payment industry & enjoys writing on entrepreneurial-related topics.