Suppose you're running a business, especially one that offers online sales. In that case, it's essential to familiarize yourself with the ins and outs of friendly fraud to save yourself and your customers from headaches in the future.
As merchants, you want to believe the best in people, and more often than not, customers aren't intentionally trying to pull one over on you; but that doesn't mean you shouldn't prepare for friendly fraud.
What is Friendly Fraud?
Friendly fraud chargebacks are commonly confused with chargeback fraud, and it can be difficult to tell the difference. A cardholder can file a chargeback when they did not receive the goods or services as described or at all.
Friendly fraud usually involves a confused customer making an honest mistake. In contrast, chargeback fraud is a customer deliberately making a dishonest claim to benefit from a system designed to protect them. For example, knowingly receiving the shoes, keeping them, and filing a chargeback saying they never arrived to get reimbursed. Discerning the customer's intent is often complicated and sometimes not possible.
Consider this scenario:
You ordered a new pair of kicks. You splurged a little, and you're riding the high of waiting for them to arrive. A few weeks go by, and the high fades-no sign of them. You check on the delivery status: delivered two weeks ago.
Thoughts start to percolate: Has someone stolen your package? Are you being scammed? Is the merchant sleazy?! You're feeling ripped off.
Not only are you disappointed about not having your new shoes yet, but now you're out of the capital as well. So what do you do?
As a customer, you might reach out to the merchant to get to the bottom of things, or you might already feel so bitter and cheated that you don't feel like the merchant will be honest and forthcoming anyways. So you file a chargeback.
You're not alone. "Chargeback management companies say 86 percent of consumers start a redress process with the card issuer, a bank, rather than a merchant," according to an article about consumer knowledge of purchasing rights by The Globe and Mail.
What does this mean as an honest merchant who did indeed ship the shoes? It means a missed opportunity to fix things with a customer before escalating to a claim. It means you've already lost the goodwill of a customer and have to decide whether to take the hit to your finances or your reputation in order to resolve things. It can be a frustrating experience, knowing you did your diligence as a merchant but losing both product and profit and your customer's faith.
As a customer, you feel comforted that chargeback options exist to protect you so you can recoup the cost of the shoes at least. That is until your spouse points out that you haven't moved the package that was delivered two weeks ago from under the front bench, and it's getting in the way.
A sinking feeling in your gut; you had the shoes all along, and the merchant had delivered their end of the deal.
This is an example of a chargeback filed by a customer under friendly fraud.
Examples of friendly credit card fraud
Friendly fraud usually constitutes a genuinely confused or misguided customer. Some recurring circumstances of this include:
- a customer unknowingly entered into a regular billing cycle,
- they thought they had canceled an ongoing service but didn't,
- they mistakenly thought they didn't receive a product (as in the shoe example above)
- family fraud (we'll get to that in a bit!)
- when a customer doesn't recognize the name of the business on their bank statement
- memory loss or confusion
- Shared credit card with a spouse and a miscommunication on purchases Friendly fraud is also different from 'normal' fraudulent claims in that the purchase has been made by the verified cardholder instead of a stolen card being used by someone else.
Family fraud: Unauthorized use of Credit Card by Family Member
Family fraud is frightfully common. It is pretty easy for our relatives to use our payment cards since they have access to our homes and personal belongings- including our physical cards and stored payment information on our devices. It could be as easy as knowing our passcode or password or using a shared device to complete a transaction using someone else's payment information.
That is why it is crucial to monitor where you save your card credentials, whom you share your PIN or passcodes to, and keep your physical card and CVV safe.
It's not always deliberate or malicious, however. You can see how it would quickly happen; the kids have a hold of mom's credit card or purchasing access on their Ipad and don't realize they are racking up a hefty iTunes bill for their favorite game.
Family (friendly) fraud can happen too- your eldest has been pleading for a new PC game, and in a moment of chaos, you agreed but don't recognize the name of the game charge on your account when it is posted-the critical difference being whether the cardholder approved the transaction.
From a merchant standpoint, however, it doesn't matter. Whether made by a family member or a stranger, the cardholder has zero liability, and the chargeback falls on the merchant.
This is why it is essential to have safeguards, especially online, to verify purchase credentials and parental consent.
In an article by CNBC where one child spent nearly three grand on a mobile game "pet tap hotel" and major corporations such as Google and Apple paid out millions of dollars in refunds for unauthorized purchases, the main takeaway to protect both cardholders from a tedious chargeback process and merchants from chargeback costs was to have safeguards in place.
Friendly Fraud Consequences: The cost for the business
Are you evaluating a chargeback claim: friendly fraud or chargeback fraud?
There are several different reasons why a customer might dispute a transaction, and it's easier for them to do so because of the faceless nature of online transactions (incidentally, this increased risk of fraudulent transactions online is why card-not-present transactions typically carry a higher processing fee).
If, for example, a customer claims they didn't realize they were still paying for a service months after they signed up for it and disputed the subsequent payments, they may be making a legitimate claim. It's probably in your best interest to reimburse the customer and re-evaluate your service agreement and messaging on your website. However, suppose you look at your records and discover that this same customer was actively logging in and using your service throughout the months in question. In that case, it is clear they are not being honest about their claim, and you would likely win a chargeback dispute.
Whether it's chargeback fraud or friendly fraud, it's essential to know the risks and protect your business by taking preventative measures to prevent fraud.
Here are some steps you can take to help protect your business:
- Use shipping and tracking tools whenever possible. This helps you monitor when your product is delivered to the customer and helps transfer some liability away from your business over to the shipping company if it was, in fact, a mistake on their end.
- Communicate your refund policy. Having a clear and easy-to-find refund policy makes it easy for customers to find the information they need if they require a refund. You can also include a clause that products need to be returned before a refund can be issued. an article by the Globe and Mail, suggests that educated customers who understand chargeback processes are less likely to file a dishonest claim and more likely to shop at your store.
- Collect as much customer data as possible. The more information you gather about your customers, the easier it is to evaluate if a claim is legitimate or not.
- Respond quickly to customer issues. Ensure your contact information is clear and visible so that customers can contact you if there is an issue, and you can resolve it with them directly.
- Be as descriptive as possible in the DBA (the name you're doing business as) on statements.
- Require ID or signature for delivery in case they've forgotten they had received an order.
- Activate payment processor tools such as Helcim Fraud Defender.
Most customers are honest and genuinely want to support your business, so by creating a comprehensive paper trail, establishing clear and well-communicated policies, and collecting customer information whenever possible, you can help protect your business if a case of friendly fraud does occur. Though you may not always know when a customer is honest in their claim, you can be proactive to ensure you're prepared if a dispute ever arises.
How to fight illegitimate chargebacks and friendly fraud
Sometimes, an illegitimate chargeback is simply a misunderstanding, but it doesn't mean that it doesn't have very real and harsh consequences to you, the merchant.
Payment processors like helcim automatically flag concerns like friendly fraud chargebacks and get to work mediating the misunderstanding to retrieve your funds and preserve your customer relationship.
Getting ahead of things and keeping your business transactions and bookkeeping up to date is key.
If things escalate, there are options for you, as a merchant, to present your case and have a chargeback overturned and your funds released. It can, however, become a time-consuming and expensive process.
When to fold
Sometimes it is in a merchant's best interest to refund their customer even when they can win the friendly fraud or chargeback case.
It can be a time-consuming process, which can end up costing you more than just the transaction cost and chargeback fee but also hundreds in arbitration fees.
That's not to say don't fight friendly chargebacks. However, your best judgment will tell you whether it is worth losing a customer and fighting a potentially lengthy battle.
Now that you understand friendly fraud, how it often occurs, what to do and how to prevent it, and even when to fold, we hope you feel better equipped to process transactions confidently. IF you find yourself in a chargeback case, your payment processor can help you navigate the process and hopefully resolve the conflict, ideally without losing your hard-earned profits.
Do businesses have to pay a fee for chargebacks?
Yes. Helcim offers a competitively low chargeback fee at $15 (compared to $20 for most other competitors), but this fee is fully refunded to the merchant if the chargeback is reversed.
Are cardholders liable for family fraud?
No. Like any fraudulent transaction, the cardholder has zero liability and can file a chargeback. That is why it is essential to protect yourself as a merchant with safeguards and verify the cardholder's identity as much as possible.
Is friendly fraud illegal?
No. Chargeback fraud is. The difference being proving the customer was intentionally deceitful about receiving the goods or services while seeking reimbursement.