What is friendly fraud?

‘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.

What causes 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:

• Refund confusion - a customer wants to return an item but isn’t familiar with the ecommerce returns process. Instead of contacting the online seller for a refund, they call the bank, and the bank initiates a chargeback 
• Customer dissatisfaction - a customer is unhappy with the products they’ve received but is not getting a satisfactory response (or gets no response) from the merchant. They contact the bank to request a chargeback. Even though the customer’s claim might be illegitimate, in this scenario, they might interpret the merchant’s lack of response as dishonesty or even a possible scam
• Buyer’s remorse - a customer regrets an online purchase, but has missed the return window. Unable to request a refund from the merchant, they file a chargeback request instead‍
• Unrecognized charge - a customer makes a legitimate purchase but does not recognize the billing descriptor on their bank statement. Suspecting that the charge may be fraudulent, they initiate a chargeback

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Learn more: 10 fraud rules you need at minimum

Friendly fraud vs. chargeback fraud

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.

What is (family) friendly fraud?

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.

3 industry verticals susceptible to friendly fraud

Friendly fraud is a risk for merchants in every industry. Yet, in some sectors, the risk is especially acute.

Video gaming

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.

Retail

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.

Travel

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.

Friendly fraud consequences for merchants

Disputes and chargeback resulting from friendly fraud can have serious consequences for merchants, including:

• Lost stock - as the cardholder can file a chargeback request and have their money refunded without returning the product, the merchant has lost stock
• Chargeback fees - merchants are charged chargeback fees by their bank for processing a successful claim, which can add up to more than twice the amount of the original transaction
• Wasted overheads - the cost of packaging and shipping the product are wasted 
• Challenging dispute costs - even if the customer doesn’t win their dispute, the merchant still has to spend time and resources challenging it‍
• Increased chargeback ratio - chargebacks push up a merchant’s chargeback ratio, which could result in them being placed on a dispute monitoring program. If they don’t manage to bring their chargeback ratio down, they may have to pay fines

Is friendly fraud preventable?

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.

How to prevent friendly fraud?

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. 
• Use a strong authorization software. Authorization protocols, like 3D Secure, can be used to fight fraud through advanced verification procedures. While you can’t stop legitimate customers from accidentally initiating chargeback requests, you can at least stop buyers who have more malicious intentions that could result in chargebacks 
• 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.
• Create an easy return process for your customer. You should make it as easy as possible for your customers to return products that they are unhappy with or that don’t suit their requirements. For example, including a return form with instructions in the packaging when you ship an item. You should also be communicative with any customer who does want a refund, and clearly spell out your returns policy

How to deal with friendly fraud

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:

1. Clearly communicate your returns policy
2. Keep the customer updated
3. Improve your customer service
4. Make your billing descriptors clear
5. Consider delaying billing
6. Recurring transactions should be canceled promptly

This is by no means an exhaustive list. Learn more about how to prevent chargebacks here.

Prevent friendly fraud with Checkout.com

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.