One of the threats merchants have to deal with when accepting payment cards is chargebacks. All major card schemes set out chargebacks, so cardholders can reverse unauthorized charges to their accounts and recover stolen funds.

A common chargeback you should know about is friendly fraud. Friendly fraud chargeback was established as a consumer protection mechanism to protect customers using credit cards online. However, the chargeback process created a loophole that allows customers to commit fraud themselves.

So what actually is friendly fraud? What forms does it take? And how can you prevent chargeback fraud?

What Is Friendly Fraud?

Friendly fraud, sometimes known as first-party fraud or chargeback fraud, happens when a cardholder makes a purchase and then disputes the charge with their bank. The cardholder can then keep the item or benefit from the purchased service without paying for it.

Friendly fraud covers both malicious and accidental fraud. The challenge is proving that a consumer acted maliciously to defraud your company. This is because “friendly fraudsters” are essentially indistinguishable from regular customers, and guidelines of chargebacks are stacked in favor of the cardholder requesting a refund from the issuing bank.

Types of Friendly Fraud

There are several types of friendly fraud. Here are the common ones.

1. Cyber-Shoplifting

Sometimes, consumers make legitimate purchases with the intention of committing “item not received” scam. Once the cardholder receives the purchase, they will call their bank and dispute the charge. The perpetrator may falsely claim that the purchase was unauthorized or that the products or services delivered were faulty.

2. Customer Confusion

Many customers don’t understand the difference between chargebacks and refunds. Instead of contacting the merchant for a refund, they go directly to their issuing bank and reverse the charges, resulting in a chargeback.

Cardholders may also make a purchase and forget. Consumers could dispute the charge when they don’t recognize a purchase or the billing statement descriptor.

3. Family Fraud

Some consumers share credit cards with their family members. Family fraud, also known as shared card fraud, occurs when a household member makes a purchase without the primary cardholder’s knowledge.

Kids often steal their parents’ cards and use them to buy in-app purchases for video games, for instance. Since the cardholders didn’t consent to the purchase, they may contact their bank and tell them the charge wasn’t authorized.

4. Merchant Error

Sometimes, the issue lies with the merchant. Instances of merchant error could include a merchant not shipping out the order, shipping out a broken item, or the product isn’t as described (wrong color, counterfeit, etc.).

Another possible reason could be a merchant not canceling a recurring payment as requested. When a cardholder feels like they’ve been tricked or didn’t receive what they paid for, they may file a chargeback on that transaction.

5. Policy Abuse Fraud

Customers prefer merchants with a seamless return policy. However, if a merchant has a lax refund policy, it’s easy for some buyers to commit friendly fraud. Businesses that allow consumers to return items without reason and those that don’t limit the times a customer can ask for refunds tend to be more susceptible to friendly fraud.

How To Prevent Friendly Fraud

No matter the cause, chargeback-related costs can be steep for businesses. Here are some steps that merchants can take to prevent friendly fraud.

1. Call Customers To Validate the Purchase

If you identify a suspicious transaction, like an unusually large purchase, initiate a phone call to finalize the purchase. For example, if your average transaction is $200, and a customer places an order for $5,000, that warrants an inquiry.

Call the customer to verify that the purchase is legitimate. Depending on local laws, you could even record the conversation and use it as evidence later if the consumer files a chargeback.

2. Document Evidence of Product Delivery

Having tracking and shipping processes in place is a good way to verify that customers receive their orders. You may want to ask the customer to sign for the purchase upon delivery.

A signature verifying that the listed customer received the merchandise can discourage the cardholder from committing chargeback fraud.

3. Deliver Exceptional Customer Service

Offer great customer service. A helpful and always available customer service team will make consumers feel that their voice is heard.

Make it easy for your customers to contact you by phone, online, and on social media. Then quickly and respectfully respond to inquiries and complaints.

If customers know you’re willing to help, they are more likely to seek help from you first, not file a chargeback straight away, or share their experience on consumer complaints sites.

4. Maintain Clear Policies

A customer may feel an item or service doesn’t match the description or is just unhappy with the purchase. Instead of contacting the merchant to file for a refund, they request a chargeback from the card-issuing company.

Providing clear cancellation and refund policies that are easy to find can guide the customer on where to request a refund. For instance, refunds on Epic Games Store are quick and easy, thanks to their clear and fair refund policies.

Stores that sell physical products often state that refunds are issued once the item is returned and specify how long customers have to return purchases.

5. Blacklist Repeat Offenders

Successful fraudsters are often habitual offenders. One of the best ways to prevent intentional friendly fraud is to stop would-be fraudsters from making purchases. Keep a list of customers who request chargebacks and block their attempts to make purchases.

6. Use an Identifiable Descriptor

Make sure your company is easy to identify on bank statements. Customers who see an unrecognizable descriptor on their bank statement will likely dispute the charge.

Making sure your business’s brand name matches the legal billing name can help customers identify where the billing is coming from. You may also include the company’s website address to minimize customer confusion.

Protect Your Business From Friendly Fraud

The boom in eCommerce and the increase in payment card transactions have led to a surge in friendly fraud. Consumers commit friendly fraud for various reasons, claiming they didn’t authorize the transaction, didn’t receive the purchase, the item arrived damaged, and more.

There are some things merchants can do to prevent friendly fraud. Keeping detailed records, delivering outstanding customer service, and blocking repeat offenders are ways of lowering the risk of friendly fraud.