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Chargebacks vs. refunds
‘Friendly fraud’ is a contradiction in terms. There’s nothing friendly about fraud, especially when your customer is behind it.
Sometimes known as ‘accidental friendly fraud’, friendly fraud occurs when a customer accidentally disputes a legitimate transaction in order to initiate a chargeback.
Friendly fraud is worse for merchants selling online or through mobile channels. 41% of their chargebacks are attributable to friendly fraud compared to 35% for physical store-based merchants. In-app digital goods merchants have it harder still. Nearly half of the chargebacks they experience are thought to be the result of friendly fraud.
Friendly fraud always involves the customer making an illegitimate chargeback request, but it takes a number of forms. In some cases, the merchant is more at fault, and in some cases, it's the customer.
It’s important to be aware of the causes so you can take steps to mitigate the risk of friendly fraud.
Here are some of the most common scenarios:
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Learn more: 10 fraud rules you need at minimum
The difference between friendly fraud and chargeback fraud is intent.
When a customer commits chargeback fraud, they make a purchase knowing full well that they intend to request a chargeback, regardless of the quality of the product and customer experience, and to keep the product in question. Chargeback fraud is a malicious act.
In contrast, as we can see in the examples above, friendly fraud occurs when a customer accidentally makes an illegitimate chargeback request to their bank, often due to confusion or a poor customer experience.
Family fraud occurs when a family member, usually a child, makes purchases without the knowledge of their parent or guardian. The seamless nature of the modern ecommerce industry, with card details stored for frictionless payments across multiple devices, has vastly increased the chances of family fraud.
For example, friendly fraud often happens when a child either inadvertently or deliberately makes in-app purchases while playing a mobile game on their parent’s phone.
Friendly fraud is a risk for merchants in every industry. Yet, in some sectors, the risk is especially acute.
Friendly fraud is a common problem in the video gaming industry. This type of fraud may occur when a gamer decides to spend money on upgrade packs to beat a certain level and regret it later. Or, as we’ve seen in many headlines in recent years, it can also occur when purchases are made without the cardholder’s permission – kids using their mum’s credit card to make purchases without asking.
Online retailers are at constant risk of friendly fraud simply due to how easy it is for a consumer to say they didn’t receive the goods they ordered or that the goods are faulty. The growth of ecommerce due to the COVID-19 pandemic has seen instances of friendly fraud reach new heights.
While the travel industry has always dealt with its fair share of friendly fraud – the International Air Transport Association estimates that airline fraud costs airlines and travel agencies more than $800 million per year – the COVID-19 pandemic supercharged the risk. Airlines and other travel companies have received a wave of chargebacks over the past year, with travelers looking to get their money back from canceled trips. And while many of these chargebacks are legitimate, many are also likely to be instances of deliberate or friendly fraud.
Disputes and chargeback resulting from friendly fraud can have serious consequences for merchants, including:
When it comes to fraud, nothing is completely preventable. But, there are measures that will help you keep your friendly fraud rates to a minimum. For businesses that have high chargeback rates, these measures will be an important step to bringing this rate down.
Authenticating transactions is one of the measures that will prevent chargebacks. Analyzing transaction data will allow you to predict which transactions are likely to result in friendly fraud, you can then challenge those transactions. A digital fraud tool that makes use of machine learning and rules will help to stop suspicious activity before it becomes a dispute.
If the transaction has already gone through, though, there are still steps you can take. Pre-disputes resolution tools should form part of your fraud strategy. This will allow you to resolve the dispute before the chargeback process starts. You can then resolve it before it counts toward your dispute ratio.
A disputed resolution tool will then help you to easily manage your chargebacks and should increase your chances of winning disputes. This includes knowing what evidence to send for which dispute and doing this all through an easy-to-use dashboard.
When it comes to fraud, nothing is completely preventable. But, there are measures that will help you keep your friendly fraud rates to a minimum. For businesses that have high chargeback rates, these measures will be an important step to bringing this rate down.
There are a few ways that you can deal with friendly fraud so that it doesn't have a big impact on your business. Here are a few practical tips:
This is by no means an exhaustive list. Learn more about how to prevent chargebacks here.
Dealing with customer disputes, chargebacks and instances of friendly fraud are a reality of accepting payments. But there are plenty of tactics and tools at your disposal to minimize friendly fraud and all the costs and complexities involved.
Our disputes API provides recommended solutions and advice on responding to each dispute, helping you with case-by-case decision-making, resolving disputes faster and reducing the administrative costs involved.
To find out more, contact our team of payment experts, or read more about our Fraud Detection Pro product to avoid fraud and unnecessary chargebacks.