what is friendly fraud - woman by a shelf

What is friendly fraud and how can you prevent it?

Wednesday, October 29, 2014

To keep your business running, you’ll need to rely on taking all sorts of payments from your customers, including debit and credit cards and mobile payments. One of the biggest nuisances you’ll have to deal with in accepting credit cards is chargebacks. Chargebacks happen when a cardholder asks their bank to reverse the charge on their card. A specific chargeback type you should know is friendly fraud. In this article, we’ll cover the basics of friendly fraud—what you need to know and how to prevent it in your small business. To start, let’s define friendly fraud.

What is friendly fraud?

Fraud is a scary term, and it’s something that can really hurt your business. One specific type of fraud is friendly fraud, but it’s not often very business friendly. Again, chargebacks happen when a cardholder talks to the card issuing bank and asks them to reverse a transaction. Often, they can have a legitimate reason. Other times, they don’t. 

In friendly fraud, fraudsters tell their card issuer to reverse a charge, although they have no legitimate reason to do so. Friendly fraud is on the rise, especially with the increase in ecommerce merchant websites.


80% of merchants have seen an increase in chargebacks in the last three years

A recent survey found that 80% of merchants have seen an increase in chargebacks in the last three years.

People call it friendly fraud because consumers often have a believable and credible story that they tell their bank, but in actuality, there’s only a hint of truth in their complaints. Let’s take a look at the four most common reasons for friendly fraud.

#1 Customer malice

This reason involves a customer who intends to dispute a charge falsely. They will make a legitimate purchase from a business like yours and then lie about the chargeback reason. This type of friendly fraud is sometimes called chargeback fraud because it involves the cardholder knowingly filing a chargeback with the credit card company. Maybe they’ve heard from someone that doing this can get them the product from the retailer for free. Or they have filed a chargeback in the past but abuse the process along the way. To get the chargeback, they’ll lie about not being able to contact your business or that you wouldn’t refund their purchase. Of course, these claims are illegitimate, but fraudsters will try to convince the bank to refund them for the purchase.

#2 Customer confusion

This reason involves confusion from the customer. The customer claims they have no knowledge of the transaction in question. Maybe the customer forgot that they made a purchase. Another common issue is the merchant’s descriptor on the customer’s billing statement is different from the merchant’s name. Therefore, they’re confused and believe they see a fraudulent purchase on their credit card. Lastly, they may see a recurring bill on their credit card and forget that they authorized the transaction. While these reasons seem innocent enough, cardholders should be contacting the merchant to handle these questions.


#3 A bad customer experience

This reason happens due to a bad customer experience. Friendly fraudsters believe they didn’t get the product they ordered, or the merchant deceived them. Instead of contacting the merchant directly, they’ll go straight to their bank and file a chargeback dispute. Fraudsters may also try to get a refund from the merchant, and if that is unsuccessful, they’ll resort to friendly fraud. 

#4 Family fraud

This reason happens if a family member of the primary cardholder gets ahold of the card and makes a purchase without the cardholder knowing. Often, this is a kid stealing a parent’s credit card and using it to make a purchase. With the rise of ecommerce and in-app purchases in video games, it’s easier than ever for sneaky teenagers or children to get a hold of a parents’ credit card and make purchases. Many video games give purchase amounts in terms of in-game currencies, so younger children may not even realize how much money they’re spending.

What does friendly fraud look like?

As a business owner, you’re probably wondering what friendly fraud looks like. Let’s give a typical example that deals with your business’s billing descriptor on a customer’s credit card statement. You own Frank’s Furniture, an online furniture store. A customer makes an online purchase for a chair from your ecommerce store. They receive the chair, and love the product. At the end of the month, they review their credit card billing statement and they don’t see any online transactions from Frank’s Furniture. Instead, they see a transaction with the merchant ID as Francis Building Co. Not recognizing your business name on the billing descriptor and thinking it was an illegitimate transaction, the cardholder contacts their bank and disputes the transaction. While this is simply a misunderstanding, it can affect your business, especially if the cardholder doesn’t contact you to address it first. 

What’s the difference between friendly fraud and true fraud?

After learning more about friendly fraud, you might wonder what the difference is between it and true fraud. True fraud happens when a thief steals card information from a cardholder and then uses it to make illegitimate transactions. When a cardholder is the victim of true fraud, their best defense is the use of chargebacks.

In contrast, friendly fraud is when the cardholder tries to file a chargeback without real cause, which is fraud against the merchant. In other words, in true fraud, the cardholder is the victim. In friendly fraud, the victims are the issuing bank, acquiring bank, card network and merchant.

What’s the cost of friendly fraud?

As we’ve seen, friendly fraud is on the rise. This is in part because customers expect merchants to be prompt in responding to their customer service inquiries. When businesses take a long time to respond, customers get impatient. With the possibility of filing a chargeback at their fingertips, many customers see friendly fraud as the quickest way to get a refund on their purchase. However, they don’t realize the impact that friendly fraud has on businesses like yours.

If the chargeback comes from a card-not-present transaction, the merchant is at fault. This means a loss of your goods, the costs of the chargebacks and the risk of alienating customers if your business disputes the chargeback. In addition, businesses also forfeit shipping costs and transaction fees, and are stuck paying chargeback fees. Plus, if you work with a payment processor, you’ll also be stuck with paying the credit card processing fees for the original transaction. When dealing with chargebacks, all of these fees can add up.

Social media makes it easier than ever for consumers to post their experiences with businesses online for everyone to see. This may make you shy away from challenging chargebacks, especially when it’s friendly fraud. While you may think this is the best course of action for your business, the reality is that chargebacks cost your business a lot of money. 

Chargebacks also increase your chargeback ratio, which could affect your ability to take payments at your business. Letting customers off the hook for friendly fraud also perpetuates the cycle of bad customer behavior.

Businesses like yours aren’t the only losers when it comes to friendly fraud. The card issuing bank also loses. This is because they want to please their cardholders and are quick to file chargebacks on their behalf. They adhere to the chargeback codes set forth by the card networks like Visa and Mastercard, which put the customer first. Issuing banks will also refund their customers to keep them happy, even if the chargeback is illegitimate. If they refute the requested chargeback from the cardholder, they risk losing the cardholder’s business. Now that we’ve talked about friendly fraud, let’s discuss how preventable it is and what your business can do.

How your business can prevent friendly fraud

As you can see, friendly fraud detection is a difficult issue. While you can prevent instances of true fraud by implementing security measures, friendly fraud is a tougher problem to solve.

Here are a few things you can do to improve your business and help limit friendly fraud for your business: 


  • Utilize authentication tools – There are a variety of tools that can help your business authenticate cardholders. While these tools won’t help you catch friendly fraudsters, they can help you obtain customer data for your records should you need to fight friendly fraud.
  • Describe your business accurately – Ensure your billing descriptors match your business to make it easily identifiable to your customers. This can help limit confusion for customers.
  • Strive for consistent customer service – Work to make sure your customers can reach you by phone, online and social media. Then respond promptly to keep customers happy and limit friendly fraud chargebacks.
  • Fulfill and track orders – It’s important to ship items to your customers within the specified time frame and include tracking so your customers know when to expect goods from your business.
  • Alert customers of recurring payments – For subscriptions and recurring payments, it’s essential to notify customers about an upcoming charge, so they’ll expect to see the charge on their credit card. 
  • Outline your return & refund policies – When customers know your return and refund policies, they’re more likely to work with you to resolve an issue. Unclear policies lead to more customers taking matters into their own hands, bypassing you in the process.
  • Send a delivery confirmation – When shipping to your customers, work with partners who can send you a delivery confirmation: to keep for your records and notify your customers that their package is there.

If you find yourself facing friendly fraud and dispute the chargeback, the chargeback process begins. While a last resort, the chargeback process gives your business an opportunity to state your case in representment and reverse the fraud claim.

The bottom line is that friendly fraud is anything but friendly. And while you can’t directly prevent friendly fraud, you can improve your business’s practices in order to make it easier for a customer to work with you to resolve any issues they have.

Ready to work with a payment processor who can help you navigate friendly fraud?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind.