Friendly fraud is a growing threat that’s costing businesses billions each year. Unlike traditional fraud, it involves legitimate customers disputing valid charges, often unintentionally.

At Intelligent Fraud, we’ve seen firsthand how this deceptive practice can wreak havoc on companies’ bottom lines and customer relationships. In this post, we’ll explore the ins and outs of friendly fraud and provide actionable strategies to protect your business.

What Is Friendly Fraud?

The Deceptive Practice

Friendly fraud is a deceptive practice that harms businesses. It occurs when customers dispute legitimate charges with their bank, often claiming they never received the goods or services, or that the transaction was unauthorized. This results in a chargeback, leaving merchants out of pocket and dealing with additional fees.

The Mechanics of Friendly Fraud

Friendly fraud happens for various reasons. Sometimes it’s unintentional – a customer might forget about a purchase or fail to recognize a charge on their statement. Other times, it’s deliberate – a customer receives a product but claims it never arrived to get a refund while keeping the item.

A common scenario involves subscription services. A customer signs up for a free trial, forgets to cancel, and then disputes the charge when the paid subscription kicks in. Another frequent occurrence is when a family member makes a purchase without the cardholder’s knowledge, leading to a dispute when the charge appears.

Friendly Fraud vs Traditional Fraud

Unlike traditional fraud where a criminal uses stolen card information, friendly fraud involves the actual cardholder. This makes it particularly challenging to detect and prevent. Traditional fraud often triggers red flags like unusual purchase patterns or mismatched billing information. Friendly fraud, however, looks like a normal transaction until the dispute is filed.

A report from Juniper Research projects that the value of eCommerce fraud will rise from $44.3 billion in 2024 to $107 billion in 2029. This staggering figure underscores why businesses need to take this threat seriously.

The Psychological Aspect

Understanding the psychology behind friendly fraud is key. Many customers who commit friendly fraud don’t view their actions as fraudulent. They might rationalize it as a harmless way to save money or deal with buyer’s remorse. This mindset makes education and clear communication essential in prevention strategies.

Businesses that invest in customer education about the consequences of friendly fraud can reduce incidents significantly. For example, a European bank saw a significant drop in phishing-related losses by introducing mandatory customer education programs alongside PSD2 compliance. This approach not only protects the bottom line but also fosters better customer relationships.

The Impact on E-commerce

The rise of e-commerce has correlated with increasing rates of friendly fraud. Online transactions often receive less scrutiny than in-person purchases, making them more susceptible to this type of fraud. E-commerce businesses must adapt their fraud prevention strategies to address this growing threat.

As we move into the next section, we’ll explore the specific impacts of friendly fraud on businesses and why it’s become such a formidable enemy in the digital marketplace.

How Friendly Fraud Damages Your Business

The Financial Impact

Friendly fraud inflicts severe financial damage on businesses. A report from Juniper Research projects that losses from online payment fraud will exceed $362 billion globally over the next 5 years, with friendly fraud as a major contributor. The true cost multiplies when you factor in the additional expenses: for every dollar lost to friendly fraud, merchants spend $2 to $3 to resolve chargebacks and rebuild customer relationships.

Operational Burdens

Friendly fraud doesn’t just hit your wallet-it drains your time and resources. Merchants must allocate valuable staff hours to investigate claims, gather evidence, and fight chargebacks. According to Chargeback Gurus, merchants have 20 days to fight a chargeback by submitting representment. This time could otherwise fuel core business activities, drive innovation, or enhance customer service.

Eroding Customer Trust

Friendly fraud creates a toxic atmosphere of distrust between merchants and customers. To combat this issue, businesses often implement stricter fraud prevention measures. However, these can increase friction for legitimate customers during transactions. A study found that 17% of customers abandon their carts due to security concerns or complex checkout processes (a direct result of heightened anti-fraud measures).

Long-lasting Repercussions

The effects of friendly fraud extend far beyond immediate financial losses. High chargeback rates often lead to increased processing fees and damage a merchant’s reputation with payment processors. In extreme cases, businesses may lose their ability to accept credit card payments altogether-a potentially fatal blow for e-commerce operations that rely heavily on card transactions.

The Ripple Effect on Innovation

When businesses must constantly defend against friendly fraud, it diverts resources from innovation and growth. Instead of developing new products or improving customer experiences, companies find themselves stuck in a defensive posture. This stagnation can lead to a competitive disadvantage in fast-moving markets.

The pervasive nature of friendly fraud demands a comprehensive approach to prevention. In the next section, we’ll explore effective strategies to shield your business from this threat while maintaining positive customer relationships. These tactics will help you strike the right balance between security and user experience, ensuring your business stays ahead in the fight against fraud.

How to Shield Your Business From Friendly Fraud

Enhance Your Communication Strategy

Clear, consistent communication forms your first line of defense against friendly fraud. Make your billing descriptors crystal clear so customers can easily recognize charges on their statements. Nearly half of merchants estimate that friendly fraud is responsible for 50% or more of their chargebacks.

Send detailed order confirmations and shipping notifications. Include product descriptions, expected delivery dates, and your contact information. This transparency reduces the likelihood of customers disputing charges out of confusion or forgetfulness.

Streamline Your Customer Service

Excellent customer service prevents many potential friendly fraud cases. Make it easy for customers to reach you through multiple channels – phone, email, chat, and social media. Respond promptly to inquiries and complaints.

Implement a clear, hassle-free return policy. Many customers resort to chargebacks because they find the return process too cumbersome. A simple return process encourages customers to come to you first rather than their bank.

Use Advanced Fraud Detection Tools

Modern technology offers powerful weapons against friendly fraud. Machine learning algorithms analyze transaction patterns and customer behavior to flag potential risks before they escalate into chargebacks. These tools reduce fraud while also minimizing false positives that might alienate legitimate customers.

Implement 3D Secure 2.0 for an extra layer of authentication. This protocol adds minimal friction to the checkout process while significantly reducing the risk of unauthorized transactions.

Build Strong Relationships with Payment Partners

Your payment processor and card networks become valuable allies in the fight against friendly fraud. Regular communication with these partners helps you stay ahead of emerging fraud trends and best practices.

Some processors offer chargeback alert services, notifying you of disputes before they become formal chargebacks. This gives you a chance to resolve issues directly with customers, potentially avoiding costly fees and damaged relationships.

Educate Your Customers

Customer education plays a vital role in preventing friendly fraud. Provide clear information about your billing practices, return policies, and the consequences of filing false chargebacks. Many customers who commit friendly fraud don’t realize the impact of their actions.

Try to create informative content (such as blog posts or FAQ sections) that explain common billing issues and how to resolve them. This proactive approach empowers customers to solve problems without resorting to chargebacks. Digital receipts functionality, like the one launched by American Express, can give customers a better look into specific transaction data, potentially reducing chargebacks.

Final Thoughts

Friendly fraud poses a significant threat to businesses, especially in the e-commerce landscape. This deceptive practice leads to substantial financial losses, operational burdens, and eroded customer trust. The impact extends beyond immediate monetary damages, potentially hindering innovation and growth.

Businesses must adopt a proactive and multifaceted approach to combat friendly fraud effectively. Clear communication, streamlined customer service, and advanced fraud detection tools form the foundation of a robust defense strategy. Building strong relationships with payment partners and educating customers about the consequences of false chargebacks are equally important steps.

Intelligent Fraud understands the complexities of navigating the ever-evolving fraud landscape. Our solutions and expertise can help you develop a comprehensive strategy to tackle friendly fraud and other digital threats (while fostering positive customer relationships). You can safeguard your business and build a resilient, trustworthy operation that thrives in the digital age.