Friendly fraud: How to get your money back
Friendly fraud — the term that sounds scary for online retailers. It shouldn’t be surprising, as behind these two words there’s a genuine customer that disputes a transaction. Sounds tricky, wouldn’t you say? How is it possible to decide whether it’s made by a loyal customer or a fraudster?
Nowadays, friendly fraud is one of the sharpest points for online businesses, especially for e-commerce merchants. So, it’s obvious you need to do everything in your power to reduce the likelihood that customers will dispute legitimate transactions to avoid the costly chargeback dispute process.
We all wish the online world without fraud and suspicious activity, but not always everything goes as planned. Luckily, there are proven ways to reduce chargebacks, so you can prevent your business from massive losses.
But, first things first.
What is friendly fraud?
Friendly fraud happens when a cardholder wrongly requests a refund for a legitimate purchase. It can be caused by a customer’s mistake or their confusion, but the chargeback can also be filed on purpose.
The bad news is that friendly fraud is increasing and it can be a cause of 86% of all chargebacks. According to Statista, in 2018 alone, US merchants lost about $6.4 billion in payment fraud, while the analytic software company FICO estimates that by 2020 fraud will cause a $34.4 billion loss. One of the reasons for this is that the adoption of chip cards has made it harder for fraudsters to commit a crime in physical stores, so they moved to the online world.
What are the reasons for friendly fraud?
There can be different situations behind the friendly fraud. For instance, the cardholder can file a chargeback because of a family member who used a cardholder’s card without their knowledge. Another reason is that the customer finds it difficult to understand the descriptor on a bank statement (this is why we highly recommend to set up clear transaction descriptors). Also, a cardholder might dispute a charge by mistake because they simply forgot about the purchase.
Keep in mind that cardholders can dispute a transaction on purpose because they regret it and want to get their money back. It can also be caused by the product that is not as described or is faulty. Or maybe the customer tries to hide a purchase from a spouse? There are many reasons for friendly fraud so you’d better be prepared.
Picture this: When customers are not satisfied with the product they received, they can ask a merchant for a return. However, there are people that request a chargeback for various reasons, sometimes they do this for personal gain. As you can see, it’s not that easy to decide whether the cardholder is honest with you. It sounds harsh, but you need to face the fact that some customers play dirty.
CBS reports that more than 86% of all chargebacks are intentional. How do you think, the consumer’s original intention was to get the item for free or they see it as a quick fix when they no longer want the item?
Friendly fraud is friendly only by its name. The fact is that it has a damaging impact on online businesses, but also issuers and customers. And the sad truth is that for most of the customers filing a chargeback it is more convenient than contacting the merchant, so you won’t even have a chance to stop it.
8 out of 10 customers admit they fill a chargeback instead of contacting a merchant. Consumers usually don’t consider or don’t know that this comes with extra costs for merchants. As you may know, it’s not only the amount of money charged for the chargeback, but it’s also about losing the items that have been sent, the cost of delivering for the product or service, processing costs, etc. There’s no question that it is a problem, especially when the online business starts to scale.
With that being said, you can find several tips and tricks that might help to reduce friendly fraud in the following.
Payment solutions packed with security tools
It’s impossible to stop fraud completely, but you can effectively mitigate it by working with a reliable payment processor. Before you decide which payment gateway to use, ask for the security tools it provides to make sure that your business will be highly protected. Perhaps it’s time to switch to another payment provider?
Look for a set of anti-fraud tools that score risk based on rules. However, it’s better when the system can be adjusted to a certain industry rather than the static solution with the rules that apply to every business model. Solutions based on typical scoring may block legitimate transactions that were labeled as suspicious by the system.
Keep in mind that, according to the new Visa Claims Resolution, the reason code 75 “Transaction not Recognized” has been removed. This means that when customers claim that they don’t recognize the transaction, it can be simply moved to the category of fraud. Then, the merchant needs to provide the necessary compelling evidence.
Overall, you need a multi-level risk protection that adapts to new fraud patterns in real-time to quickly detect activity that raises a red flag. What also could help is advanced verification that requires a fingerprint or facial recognition, which works great on mobile devices.
Non-invasive 3D Secure authentication
With 3D Secure, the customer’s card is verified by the bank during the purchasing process, so it’s getting difficult for a customer to claim an unauthorized charge. This security layer is often overlooked by merchants, as they consider 3D Secure authentication a conversion killer.
This is why here at SecurionPay, we’ve developed the non-invasive 3D Secure that doesn’t interfere with your conversion rate while helping you effectively reduce the number of chargebacks. A real win-win.
Effective communication with customers
Make sure that customers know how to contact you. With outstanding customer support, you can lower the chargeback rate for unhappy customers and misunderstandings. In some cases, it’s good to contact the customer directly, which can help especially when they don’t recognize a legitimate charge.
When you run an e-commerce website, you should consider having a 24/7 customer service. Customers that know that they can always receive answers to their questions, are less likely to commit friendly fraud against you.
Based on merchants’ experience, sometimes it’s simply better to just let it go. Saying that, check whether the customer was buying something from you before and try to estimate the lifetime value of the relationship. This, of course, may encourage such customers to dispute a legitimate transaction again in the future, but sometimes it’s worth to deal off.
All you want is to prevent the situation when the customer dispute escalates to a chargeback, so contact the customer immediately after receiving a complaint or the information that they want to file a chargeback. The more responsive you will be, the higher chances that it won’t impact your chargeback ratio.
Moreover, in case of having to deal with the chargeback, the copies of all electronic communication always help, so keep it archived for at least 30 days.
Return policy and delivery tracking
Furthermore, having a delivery tracking mechanism in place will help you verify whether the customer received the order or not. Also, it’s always good to have signed a proof of delivery to the cardholder’s shipping address. When there’s a signature required, you will have a paper trail that may be useful in case of submitting the evidence under the representment process.
Having return and refund policies set isn’t a guarantee that the friendly fraud won’t happen, however, it’s good to clearly present such information on your website and ensure that the customers are well-informed of your policies. If it will be difficult for them to find any information about the returns or refunds, they may opt for the chargeback process to get their money back.
The spectrum of friendly fraud is huge and it’s a serious problem for online sellers, as it’s really difficult and challenging to detect and not that easy to fight. All in all, it’s a legitimate transaction, not typical fraudulent behavior, so it’s hardly ever detected by fraud prevention tools.
Friendly fraud can vary across industries, so sticking to proven solutions and having security tools that can be simply adjusted to a specific business is a no-brainer. Otherwise, it will become a significant cost burden for you.
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