Your customers may not be out to commit fraud, but they do it more often than you think–and often without realizing it. If you’re like most merchants who do business online, there is a good chance that you’ve been exposed to (or will soon encounter) friendly fraud.
What Is Friendly Fraud?
Friendly fraud occurs when a consumer asks their bank or credit card to issue a chargeback, or refund, for something they purchased from you—even when that refund is unwarranted.
Friendly fraud is often the result of innocent scenarios: a customer forgets about a legitimate purchase, doesn’t recognize your business name on their statement, or isn’t aware that a family member bought something from you. In other cases, a customer may intend to make a return and receive a refund, but bypasses you and goes directly to their bank or card issuer for a chargeback instead.
This type of friendly fraud happens so often because it’s so easy for the consumer to do it. Not only are card issuers typically available 24/7, but they often display an easy-to-use “dispute” button alongside transactions. Whether customers want a quick and easy way to get their money back or simply to avoid conflict, they are rewarded with a chargeback process that is painless, simple to initiate, and stacked in their favor. It’s very easy for consumers to commit friendly fraud…and much harder for merchants to dispute it.
How Does Friendly Fraud Hurt Your Business?
The term friendly fraud is sometimes used interchangeably with chargeback fraud, and both essentially amount to cyber-shoplifting. According to Javelin’s 2017 Financial Impact of Fraud study, all fraud, not just friendly fraud, costs merchants 8% of annual revenue—and most of that is swallowed up by the cost associated with managing the fraud. Furthermore, the rate of fraud is on the rise: merchants who sold products online saw chargebacks increase by 60% in 2017.
While it may be an honest mistake, friendly fraud still has serious financial repercussions for your business. When a customer requests a chargeback, the refund is automatically deducted from your bank account and you’re charged a substantial chargeback fee as high as $20-$50.
But when you experience friendly fraud, it’s not just the automatic deductions and chargeback fees that can hurt: you also lose revenue in the form of essentially stolen goods and services, as well as sunk shipping costs. Then there’s the added cost and headache of researching and disputing chargeback claims, producing documentation, and dealing with cash flow issues that arise when your bank automatically refunds a customer because of friendly fraud. According to Chargeback.com, online retailers were set to lose $6.7 billion due to fraud in 2016, with 71% ($4.8 billion) of it being friendly fraud.
How can you prevent friendly fraud?
While you can’t completely stop friendly fraud, you can take smart steps that make it less likely to happen. Protect your business from friendly fraud and chargeback fraud with these common sense measures:
- Conduct your business in a professional manner. Obtain customer authorization for every transaction, pack the correct merchandise for shipment, ensure orders arrive on time, and be clear about your cancellation and returns policy. Friendly fraud can occur because of gaps in communication or unmet expectations, so set your business up for success by running a professional operation each and every time.
- Communicate with customers from the very beginning. Good communication is the key to preventing friendly fraud. Your customers should receive an automatic email confirmation when an order is placed so that both you and they have a record of the transaction. Another way to avoid friendly fraud is to be clear about your return policy and procedures. Finally, document all customer interactions in case you have to dispute a chargeback in the future.
- Prevent friendly fraud by helping customers remember who you are. Did your customer sign up for a recurring payment plan? Remind them with a courtesy email before an automatic payment goes through. It’s not unusual for a customer to forget they ever signed up for recurring payments, especially if they’re on a less frequent basis like quarterly or annually. Additionally, be sure to use a clear business and product descriptor alongside transactions, so that customers easily recognize the charge on their card statement and don’t unintentionally commit friendly fraud by disputing it.
- Confirm that shipments successfully reach your customer. Another way to avoid the high cost of friendly fraud is to use shipment tracking or signature confirmation when you send orders out for delivery. A package left on a doorstep can be vulnerable to theft, and if your customer later claims they never received it, you’ll be on the hook.
Friendly or legitimate, it is important to understand how chargeback fraud can affect other areas of your business. To understand the relation chargeback fraud has to your ability to be accepted for a merchant account, read our post – Your Complete A-Z Guide to Merchant Accounts.
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