Friendly Fraud Survival Guide: How Small Businesses Can Reduce Their Chargebacks & Save Money

The term friendly fraud is a study in contradiction. Fraud is a malicious act. How can it ever be friendly?

Fortunately, there is another term used to describe the same situation: chargeback fraud. At the very least, the term gives a little better clue to the type of fraud it might be. How can fraud be perpetrated through chargebacks, and is there anything you, the merchant, can do to prevent this type of fraud? Read on to find out.

What Is Friendly Fraud?

Friendly fraud occurs in connection with a chargeback claim. In other articles, we give a more detailed explanation on what a chargeback is and why a cardholder’s bank will allow a chargeback, but a quick summary is that a chargeback is a type of refund from the credit card issuing bank to the cardholder, which the merchant has little to no power to contest.

There are quite a few reasons why an issuing bank might initiate a chargeback. Among these are:

• No authorization by cardholder
• Goods/services returned or refused
• Goods/services canceled
• Goods/services not received
• Goods/services not as described
• Goods/services damaged or defective

As you can imagine, these reasons can be abused, and indeed they often are. These are the reasons typically given by a consumer in friendly fraud or chargeback fraud situations.

Some Statistics Related To Friendly Fraud

There aren’t a lot of recent data about friendly fraud. Many studies we found when researching for this article were from companies whose business is to help merchants to fight chargebacks, so we weren’t sure how well we could rely on those statistics.

We did, however, find one study from a neutral source that should be fairly reliable. The study, in the form of a white paper, was done by the Federal Reserve Bank of Kansas City and published in January 2016 as a working paper entitled Chargebacks: Another Payment Card Acceptance Cost for Merchants. The study is a little old and not completely focused on friendly fraud. Nevertheless, it does give some insights:

• Total chargeback rate compared to total transaction volume is 0.016%.
• Most common reason for initiating chargeback claim is fraud (i.e. transactions reported as being unauthorized by cardholders).
• Study also included chargeback numbers for “non-receipt of goods or services,” and “product quality-related reasons,” both of which can also indicate friendly fraud.
• Total chargeback rate and fraud chargeback rate are significantly higher for card-not-present transactions than for card-present transactions.
• Fraud related charges overwhelmingly resulted in a merchant loss.
• Merchants were only able to successfully dispute 20%-30% of the chargeback claims.
• Merchant losses are substantially smaller than other credit card processing fees (e.g. interchange fees, markup fees), but the study is not granular enough to calculate total loss, which includes the merchant’s loss of merchandise, labor, capital, and other time-related costs associated with fighting a chargeback dispute.

What Causes Friendly Fraud Chargebacks?

Chargeback fraud can typically be categorized into two types: one somewhat benign and the other slightly more sinister.

On the benign front, sometimes, the cardholder may simply forget making various purchases; when the purchases show up on the statement, the cardholder thinks someone else stole their card and used it to buy things. The cardholder reports this to the issuing bank and asks for a chargeback. Related scenarios include:

• Not recognizing the name of a business because the business’s legal name is different from its d/b/a name.
• Giving someone (e.g. a child) the permission to use a card without knowing the merchant’s name and/or the cost of the goods/services and then being surprised by the charges.
• Not realizing that calling the issuing bank and asking for a chargeback is different from getting a store refund and has very different repercussions for the merchant.

On the slightly more sinister side of things, some card users make purchases with no intention of paying. After a product is shipped, the cardholder calls the issuing bank and asks for a chargeback, claiming that they received damaged goods, that the goods were not received, that the goods were not as described, or similar. The bank credits them, but they never have to send the goods back to the merchant because they never tried to work with the merchant first, to arrange for a return or exchange. While sometimes this is done because consumers do not realize that a chargeback isn’t the same as a return, other times, this is a deliberate act similar to shoplifting. The consumer intended to do it all along and will do it again and again.

What Can Merchants Do About Fraudulent Chargebacks?

The first thing you can do to prevent fraudulent chargebacks is to keep good records. This way, if you want to dispute a chargeback claim, you will have the evidence you need to submit to your processor. In addition to records of purchases, be sure to keep shipping/tracking information and evidence of delivery as well. Even if, at this moment, you have decided that you do not have time to fight chargebacks, you might feel differently in the future.

When a chargeback is actually presented to you, you can decide whether or not you wish to fight the claim. Because you’ve been keeping careful records, you should at least be able to access the evidence you’ll need very quickly.

Is It Hard To Win A Chargeback Fraud Dispute?

As a rule of thumb, chargebacks of any type are difficult to win. After all, from a total volume standpoint, merchants only win 20%-30% of chargeback disputes.

The issuing bank’s relationship is with the cardholder, so they tend to take on the cardholder’s views because they want their business relationship with the cardholder to remain prosperous and mutually beneficial. Additionally, if the issuing bank does not have enough employees to deal with a high number of chargebacks, they might simply allow the chargeback claim to pass down to the acquiring bank and eventually to the merchant instead of investigating the claim early on in the process.

This doesn’t mean that you should give up entirely. You might still be able to win a dispute, but your ultimate success will depend on specific facts, including what the customer claims and what kind of evidence you have at hand. For instance, if the customer claims that they never received the goods, you can show proof of delivery. If the customer didn’t recognize the name of your company because it’s different from your “doing business as” name, you might be able to win the dispute if you can provide the appropriate evidence. Just be aware that you may not win every case even if you do have the evidence.

The Final Word On Friendly Fraud

Friendly fraud is, sadly, not the only type of fraud you’ll encounter when accepting credit cards. While most people are honest — and even honest mistakes can be called fraud, as we’ve shown above — there will always be a segment of the population who intend to cheat and steal. In other words, no matter what you do, you won’t be able to completely stamp out friendly fraud.

The best approach is simply to keep good records. When you see a chargeback that you suspect is friendly fraud, dispute that claim. But bear in mind that you can’t dispute every claim; if you do, you’ll be forced to spend all day on such disputes — or farm the work out to a third-party company. Neither is likely the best use of your time or money. Pick your battles and dispute some but think about letting others go. There are other aspects of your business waiting for your attention.

Friendly fraud isn’t the only type of credit card fraud. If you’re interested in learning about other types of fraud, be sure to check out our longer article devoted to these topics.

And, as always, please feel free to share your thoughts or stories below. We always like to hear from our readers.