“Friendly fraud” occurs when a customer takes delivery of a purchase, but then initiates a chargeback against the business. The end result is that the customer winds up with free goods or services, while the merchant is forced to accept the loss of payment and subsequent fees. The phenomenon is rampant during the COVID-19 era, as online shopping becomes increasingly popular. But there are steps businesses can take to avoid these costly chargebacks.
Two Types of Chargebacks
Perhaps the customer misunderstands the merchant’s return policy. Or they may ask for a refund because what they purchased didn’t arrive in time. These examples of friendly fraud are not malicious attempts to defraud a merchant. But chargebacks are also used to commit intentional criminal fraud, in a scheme that is equivalent to online shoplifting. Thieves buy products and services they intend to keep without paying for them. They often use stolen credit cards for these illicit transactions, then dispute the charges to trigger a chargeback.
Merchant Risk and Loss
Chargebacks were originally designed to offer enhanced consumer protection. The cardholder may say that the wrong item was sent or they never authorized the transaction. In the absence of evidence to the contrary, credit card companies typically authorize a chargeback against the merchant. Nonrefundable chargeback fees are deducted from the merchant’s account, along with the refund amount. If chargebacks happen frequently enough, the merchant could even have their card acceptance privileges revoked. The burden of proof falls on the shoulders of the merchant to verify that they did, indeed, deliver. That’s why merchants should be familiar with the reason codes that designate why the chargeback was made. That will help them respond appropriately to win the dispute.
Avoiding Chargebacks and Fraud
Research from Experian revealed that the majority of businesses are experiencing a spike in chargebacks. But the chargeback investigation process is labor intensive for card issuing banks, so they may not take the time or effort to spot friendly fraud. Instead, most of the process is automated. That’s why one of the best counter measures a merchant can take is to use their own automated transaction technology. A digital archive of transaction activities, which serves as critical evidence during a chargeback investigation, can be automatically retained in the cloud for quick retrieval. A capable integrated online payment system can also issue instant invoices and purchase receipts as well as eligible refunds.
Communication is the Key
Many cases of innocent friendly fraud are triggered by a lack of customer service best practices, customer engagement, and clear communication. Deliver goods and services promptly, and provide shipment tracking numbers to customers. Make it easy for customers to report any unexpected problems with their order. Respond promptly, and grant exchanges or issue refunds quickly. When using recurring billing or subscription services, notify the customer before charging their credit card. Businesses can also create customized reports, enabling them to detect the red flags of suspicious, fraudulent activity. With the right digital payment processing system, clients and customers enjoy the advantages of secure online and mobile transactions, while businesses are protected from unjustified chargeback losses.