What is Friendly Fraud?

Friendly fraud occurs when a consumer makes an online purchase with their credit card and then disputes the charges with the issuing bank rather than requesting exchanges or refunds or confirming unrecognized charges on their statements.

In some cases, the customer has malicious intent to dispute the payment and keep the goods or services, but more often, consumers call their credit card companies to request more information about a purchase simply because they don’t recognize a billing descriptor or have enough information to trigger their memory of the purchase. They conclude that something nefarious is going on with their credit card number.

For businesses that have been aggressive at managing criminal fraud, it is estimated that the remaining fraud is typically 70% friendly fraud, 20% criminal fraud and 10% legitimate disputes. Not all friendly fraud is the same and within this remaining percentage, there may be several different reasons why friendly fraud occurs.

Types of Chargebacks

Criminal Fraud: Fraud from stolen credit card numbers or other types of financially malicious activity that result in chargebacks.

Friendly Fraud: A legitimate purchase made by a consumer with their credit card is disputed with the issuing bank rather than requesting exchanges or refunds from the merchant. It can be malicious, but more often, there may be a misunderstanding.

Legitimate Disputes: Authentic customer disputes, for example when a product arrived damaged, late, or was misrepresented in sales materials.

Friendly Fraud Challenges

Tackling fraud can be difficult because it’s hard to identify and distinguish between criminal fraud, friendly fraud, and legitimate disputes.

Reducing criminal fraud is a necessary first step in order to isolate and address friendly fraud, since they are often classified under the same reason codes. Friendly fraud requires a specialized set of tools that are typically not included in traditional fraud detection solutions. The ability to quickly and accurately identify and segment fraud can help mitigate challenges, improve operations, and increase revenue.

Learn more about friendly fraud and how Kount can prevent it.

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Types of Friendly Fraud

Accidental friendly fraud: A consumer made a purchase but doesn’t recognize it due to limited information on a bank statement.
Intentional friendly fraud: A consumer made a purchase and recognizes the purchase, but still requests a credit from the issuing bank, claiming they did not make the purchase.
Merchant error: A merchant doesn’t provide adequate support to avoid a chargeback. This can include limited merchant descriptors on a bank statement, poor customer service, etc.
Shared card fraud: Many consumers share a card with family members. As a result, if one person uses the card and doesn’t inform the other, this can lead to friendly fraud.
Policy abuse fraud: Allows users to return items within a certain time limit without needing to provide a reason. It does not typically limit the number of times you can return or request a refund. However, many companies take action if they feel a shopper is abusing the policy.
In-flight refund : When a business issues a refund, the time it takes to process could be several days to several weeks, however consumers expect the refund to be instantaneous. When the refund isn’t quick enough, the customer often calls the bank and it can be refunded twice.

Impacts of Friendly Fraud

The total cost of friendly fraud can be far more than just the cost of the lost goods. Businesses can receive chargebacks and penalties, be placed in chargeback monitoring programs, or even face double refunds and chargebacks.

Chargebacks and fees

Automatic chargebacks and penalties can occur with a dispute

Cost of lost goods

Businesses could lose out on the cost of goods if the consumer says the goods were never received

Double refunds

If a refund isn’t processed quickly enough and it is refunded twice, the business loses twice the cost of the goods and receives a double chargeback

Increase in chargeback ratio

Placement in Visa’s chargeback monitoring program could occur if transactions with chargebacks exceed 0.9%

Kount’s Near Real-Time Chargeback Prevention Solution

Intercept, stop, and resolve chargebacks to recover revenue and avoid monitoring programs with Kount’s Identity Trust Global Platform, integrated with Verifi, A Visa Solution’s dispute management tools.

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