What is friendly fraud? Causes, effects, and prevention tips
Chargeback risk statistics revealed that over half of businesses say their chargeback rates have increased since March 2020. 18% said friendly fraud is their business’s top chargeback source. A similar survey of online gamers in 2022 revealed over half of respondents cited instances of friendly fraud as the reason they disputed an online purchase.
Getting ahead of friendly fraud is critical for e-commerce success. So you’ll want to understand where friendly fraud comes from, its effects, and how to respond before disputes become chargebacks.
What is friendly fraud?
Friendly fraud (or first-party fraud) occurs when legitimate customers dispute legitimate online purchases with their issuing banks or credit card companies. Customers may dispute legitimate purchases for several reasons, but the consequences for the business are the same.
If the bank sides with the customer, the friendly fraud dispute becomes a chargeback. Ideally, legitimate customers would dispute purchases with businesses. If they did, the business could relay transaction details to clarify the purchase or issue a refund.
Types and causes of friendly fraud
Customers commit friendly fraud when they don’t recognize a purchase or billing descriptor on their credit card statement. But in some cases, the customer has malicious intent to dispute a payment and keep the goods or services.
Accidental friendly fraud
When customers don’t recognize purchases on their credit card statements, they may commit accidental friendly fraud. In these cases, it’s easy for customers to mistake charges for fraud when billing descriptors don’t match company names or the products they purchased.
Accidental friendly fraud may also stem from shared-card fraud. Let’s say, for example, a customer shares a credit card with their spouse or other family members. If one party makes a purchase that the cardholder doesn’t recognize, they may dispute the charge.
This cause of friendly fraud is prevalent in the online gaming industry especially. Between 2010 and 2014, Facebook games hit a 9% chargeback rate — 18 times the business average. Experts speculate many of these chargebacks come from children making in-app purchases that cardholders don’t consent to or recognize.
Intentional friendly fraud
In cases of intentional friendly fraud, customers make legitimate purchases but still dispute the charges with their banks. This scam is also a form of refund fraud wherein the customer’s goal is to obtain a refund for items they claim never arrived or arrived in poor condition. The customer may also claim they didn’t make the purchase to get a refund but keep the items.
These intentional schemes are all cases of friendly fraud and policy abuse. If a business has a lax refund or return policy, it’s easy for bad actors to commit friendly fraud. Lax policies include not limiting the number of times a customer can return or request a refund. They also include allowing customers to return items without reason.
Finally, intentional friendly fraud may also come from a merchant error. For example, let’s say a customer takes a dispute or other problem to the business directly. If the business doesn’t resolve the issue adequately, the customer may dispute the purchase with their bank to get a refund.
3 effects of friendly fraud
The total cost of friendly fraud can far surpass the cost of lost goods. Other costs include chargebacks and fees that can increase chargeback and disputes rates. Let’s take a closer look at the effects of friendly fraud.
1. It costs goods and inventory sold
This effect is the most apparent. When customers dispute legitimate purchases, either accidentally or intentionally, businesses lose goods and inventory. This effect can be incredibly detrimental to businesses that don’t require customers to return products to receive refunds.
2. It subjects you to chargebacks and fees
Chargeback fraud from any source is harmful to businesses. Chargebacks don’t just cost the price of the product. They also come with fees and penalties — not to mention their hidden costs. In addition, chargebacks waste a business’s operational costs and can lead to higher transaction fees.
3. It can increase losses from double-refund chargebacks
Let’s say a customer disputes a purchase with a business, and the business issues a refund. If the refund takes too long to process, the customer may dispute the charge with their bank. As a result, the customer receives two refunds, and the business gets the chargeback and fees. If the business wants to reverse the chargeback, it has to engage in the chargeback representment process.
Friendly fraud prevention: How to stop it pre- and post-authorization
There are a few ways to avoid the effects of friendly fraud. First, analyze customer transaction data to predict which transactions might lead to friendly fraud. And then challenge or decline those transactions. This analysis can help you stop disputes before you authorize a transaction.
But you can also stop friendly fraud after you’ve authorized a transaction. That’s where a friendly fraud solution comes in. A friendly fraud solution can tell you as soon as a customer initiates a dispute and give you time to act.
Knowing about a dispute when it happens means you can refund purchases quickly or communicate purchase details to banks and customers. Efficient communication can help cardholders recognize unfamiliar transactions and resolve disputes before they become chargebacks.
1. Implement a digital fraud solution to learn more about customer transactions
Stopping any suspicious activity before it becomes a dispute is the best approach to chargeback prevention. A digital fraud tool can help businesses uncover trends that lead to chargebacks.
Take, for example, a tool that uses machine learning for fraud detection. It can reveal which customers are more likely to dispute purchases or ask for refunds based on past behavior. Knowing that information, you can challenge or decline those transactions.
2. Implement a friendly fraud solution for dispute and chargeback management
A friendly fraud solution can help businesses manage disputes and chargebacks in one place. The right solution can bring together friendly fraud tools from major card brands that can help you intercept disputes. The sooner you can intervene, the sooner you can take action and avoid chargebacks.
3. Communicate with banks and initiate refunds quickly
As soon as a business receives a dispute inquiry via its friendly fraud solution, it can take action. Typically, that means sending additional transaction details that meet certain criteria — for example, Visa’s Compelling Evidence 3.0 guidelines — to banks that can help customers recognize purchases.
In some cases, businesses can set thresholds to tell banks that they’ll automatically refund purchases below a certain amount immediately. Communicating the status of a refund quickly saves time on the dispute process and reduces friction for the customer, leaving them with a good brand impression.
Holiday shopping trends increase friendly fraud risks
Kount recently surveyed 2,000 consumers about holiday shopping trends, projected spending, and previous refund behavior. Almost half (46.4%) of respondents said they’ll choose BNPL at checkout this holiday season.
While BNPL is great for consumers because it offers flexibility, this payment option puts businesses at risk. Consumers may forget about recurring payments or engage in more BNPL transactions than they can handle, increasing friendly fraud risks and accidental chargebacks.
Subscriptions as gifts also put businesses at risk of increased friendly fraud disputes during busy seasons. Many consumers forget they signed up for services and initiate disputes once they get the bill to re-up the service.
And with 44.95% of respondents saying they’re likely to purchase a retail or streaming subscription as a gift during the holiday season, businesses need to be prepared.
Friendly fraud solutions deflect disputes and save sales
From stopping criminal fraud pre-authorization to deflecting chargebacks from friendly fraud post-authorization, Kount’s solutions offer complete protection of the digital customer journey. They even helped one large retail organization avoid friendly fraud to the tune of $2.5 million, according to the latest Forrester Total Economic Impact report.
First, Kount Identify fraud solutions use AI and machine learning to deliver accurate identity trust decisions in milliseconds. The solution analyzes every interaction in the digital customer journey against billions of other data points in the Identity Trust Global NetworkTM.
This analysis establishes the potential customer’s and the interaction’s level of risk or trust in real time. In an instant, you can approve high-trust interactions, decline high-risk interactions, and stop malicious activity.
Plus, advanced reporting and analytics can give you greater insight into how criminal fraud and friendly fraud affect your business. For example, you can learn more about which products, geographies, and payment methods see the highest number of chargebacks.
Meanwhile, Kount’s Dispute and Chargeback Management solution provides a single dashboard for businesses to catch and act on customer disputes. The dashboard integrates with post-authorization tools from Verifi, A Visa Solution, Ethoca Consumer ClarityTM, and Ethoca Alerts to help businesses prevent revenue loss from friendly fraud.
Kount’s dispute management solution can help you save the sale by communicating transaction details to help customers recognize purchases. Real-time communication can reduce dispute time frames from weeks to minutes and stop double-refund chargebacks. Not to mention, faster communication and resolution can promote customer loyalty and improve customer experiences.