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Friendly Fraud: What Is It and How to Protect Your Business

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Written By: author image Natalie Jones Reviewed By: Spencer Finnell

When most people think of online fraud, the first thing that comes to mind is thieves stealing the identities of victims and using their payment information to make illegitimate purchases.

While this is one common scenario, fraud generally takes many different forms. For example, “friendly fraud” poses serious risks for online businesses like yours and is unfortunately on the rise.

In this article, we’ll go over what “friendly fraud” is, how it works, and how you can protect your business from becoming a victim.

What is Friendly Fraud?

Friendly fraud, also called chargeback fraud, is when a customer tries to get their money back by requesting a chargeback with their card-issuing bank after they’ve made a legitimate transaction. These dishonest claims to get their money back often occur days, weeks, or even months later.

If the bank honors the chargeback, the customer gets their money back and gets to keep the product that they originally purchased.

Essentially, friendly fraud is shoplifting. The customer gets a refund without ever contacting you, and the online business suffers the loss of time, money, and reputation.

Unfortunately, knowing who will commit friendly fraud is impossible until a chargeback is filed. This makes it especially challenging for businesses like yours to completely eliminate it.

Friendly fraudsters often make purchases with the intent of issuing a chargeback later, abusing the system and the bank in order to get something for free. To learn more, see our guide: What Are Chargebacks & How to Win Disputes.

How Does Friendly Fraud Work?

In order to commit this type of fraud, customers have to convince the card-issuing bank that they deserve a refund. They can cite a number of reasons, but most friendly fraudsters report that the purchase was unauthorized.

They use this excuse because it’s easy to say, “Someone must have stolen my identity.” It’s hard to prove otherwise.

Here are some other excuses they use to justify their fraudulent chargeback:

  • The item or service wasn’t delivered.
  • The merchant didn’t cancel the customer’s payment when requested.
  • The item or service doesn’t match the online description, and they don’t want it.
  • They returned the item, but a refund was not processed.
  • They canceled the order, but it was still sent to them.

When you combine the zero-liability policies of card-issuing banks, the “card not present” nature of eCommerce, and consumer protection regulations, you get an environment where banks prefer to take cardholders at their word.

As you might have already guessed, the costs can add up quickly.

Here’s what you stand to lose as a victim of friendly fraud:

  • The cost of the product or service sold. This is often the biggest expense.
  • Chargeback fees, which could be large, depending on your payment process. Stripe charges a $15 dispute fee for all chargebacks. If the merchant wins the dispute, Stripe refunds the fee and the disputed amount.
  • Shipping or service delivery costs.
  • Money and time spent disputing the chargeback.

The challenge, of course, is that any one of these claims could be valid, making friendly fraud so frustrating.

Having a system in place that helps consumers get their money back when they are wronged by a merchant is a good thing, but the system isn’t perfect.

Why Does Friendly Fraud Happen?

Chargebacks were designed as a tool to protect consumers from unfair merchant practices, but some consumers take advantage of this protection by making false claims.

Friendly fraud has been around since the beginning of online shopping, but it has grown exponentially in recent years for a few reasons in particular:

1. Everyone Shops Online These Days

In 2023, 2.64 billion people worldwide purchased goods online. In the same year, global eCommerce reached $6.3 trillion. Naturally, more online business means more online fraud.

2. Regulations Haven’t Caught Up

Friendly fraud is fraud. This means that it’s definitely illegal, but regulations simply haven’t evolved to tackle issues like this yet.

The rules governing the overall chargeback process have been slowly catching up to reflect our modern digital world that relies on massive amounts of online business.

For example, Visa made revisions to its Visa Dispute Monitoring Program in early 2023, which offers merchants a suite of procedures and resources to better manage chargebacks.

Stripe, the best online payment processor, also offers Chargeback Protection services. It covers the disputed amount and waives any dispute fees for eligible users when friendly fraud occurs.

3. Customers Prefer the Fastest and Easiest Solution

It’s no surprise that people don’t want to follow a lot of steps. They want their money back immediately without having to jump through hoops. Many cardholders feel it’s more efficient to simply fill out a form with their card issuer than deal with whatever steps the merchant lays out. In fact, 81% of online shoppers have filed a chargeback simply because it’s more convenient than contacting the online business to find a resolution.

4. Merchants Lack the Resources to Fight Back

As a merchant, you have the right to challenge any chargeback, and the card issuer has a process for it. If the process doesn’t turn out in your favor, you can always file a lawsuit, but lawsuits are time-consuming and expensive – especially if it’s over a small charge. Fraudsters know you aren’t going to take them to court over $50.

5. Banks Don’t Conduct Thorough Investigations

Card-issuing banks don’t ask for much evidence from cardholders. For instance, if the cardholder claims identity theft, the issuing bank doesn’t ask for evidence of their claim. As a default, the cardholder is assumed to be honest, and the work falls on the merchant to prove that the transaction was legitimate.

Plus, the card issuer knows that the merchant probably won’t fight the chargeback in court and can’t refuse to accept their cards. So, the issuer is incentivized to help the consumer over the merchant.

Is All Friendly Fraud Malicious?

Not all friendly fraud is completely malicious. Sometimes, it’s the result of an accident or a misunderstanding.

For example, a cardholder may issue a chargeback because they don’t recognize the merchant’s name on their statement. Using a descriptive name on your transactions is a key way to prevent chargebacks.

Another example is when a spouse or child makes a purchase without informing the cardholder. The cardholder may have given the spouse or child permission but wasn’t aware of the transaction.

Sometimes, people just forget what they purchased. This happens more than you’d think, as identity theft is such a widespread problem that people automatically think of fraud when they see something incorrect on their bank statement.

And, of course, there are some harmless customers who simply don’t understand the difference between a merchant refund and a bank-issued refund. It’s all the same from their perspective.

Sadly, these more innocent mistakes can cause trouble for everyone. The merchant takes a hit to their reputation with the card-issuing bank and/or payment processor, while the customer is often banned from doing business with the merchant.

The card-issuing bank will grow increasingly suspicious if the customer requests too many chargebacks.

What Can You Do About Friendly Fraud?

This is a tough question. It’s hard to stop friendly fraud before it occurs because it looks like a legitimate transaction.

Fraud detection tools aren’t especially helpful because the customer’s identity and payment information are legitimate.

You can protect your business from friendly fraud by having plenty of information to defend yourself if a customer requests a chargeback. If you can convince the card-issuing bank that you’ve fulfilled your obligation, you will be less likely to take the hit to your revenue and your reputation.

If you’re using WP Simple Pay, the #1 Stripe payments plugin for WordPress, to accept payments on your site, you can easily view and manage disputes in your Stripe Dashboard. By clicking on a listed dispute, you can access more information about the specific case and what you need to do to defend yourself.

We also recommend crafting a clearly written Return & Refund policy that explains how your business handles refund requests. While this doesn’t prevent friendly fraud attempts, showing the bank that you’ve made a policy available to your buyers before they complete a transaction can help win a friendly fraud dispute when it arises.

That’s all! We hope this article has helped you learn about friendly fraud and how to protect your online business.

If you liked this article, you might also want to check out our guide on how to protect your business from credit card fraud.

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