In payments, fraud impacts both businesses and consumers. It can be painful. Among the various types of fraud, “friendly fraud” is rather challenging. Despite its seemingly innocuous name, friendly fraud has financial implications for businesses.
This article gives an overview of friendly fraud, explains its causes, and provides insights into how businesses can protect themselves.
Statistics on Friendly Fraud
Friendly Fraud Accounts for 60-80% of Chargebacks: A significant portion of all chargebacks is attributed to friendly fraud, making it one of the most challenging issues for merchants to manage in the payment industry.
$3.75 in Costs per $1 of Fraud: For every dollar lost to friendly fraud, businesses incur an additional $3.75 in related costs, including chargeback fees, lost merchandise, and administrative expenses.
14% of Consumers Admit to Committing Friendly Fraud: A significant minority of consumers acknowledge having disputed legitimate transactions, highlighting the deliberate aspect of some friendly fraud cases.
40% of High Chargeback Merchants End Up on the MATCH List: Merchants with excessive chargebacks, often due to friendly fraud, risk being placed on the MATCH list, limiting their ability to find payment processors.
46% Higher Success Rate with Detailed Evidence: Merchants who provide comprehensive evidence when disputing chargebacks are 46% more likely to recover their funds, highlighting the importance of thorough record-keeping.
70% Reduction in Fraud-Related Chargebacks with Prevention Tools: Implementing fraud prevention measures like AVS, CVV, and 3D Secure authentication can reduce fraud-related chargebacks by up to 70%, making these tools essential for merchants.
What is Friendly Fraud?
Friendly fraud occurs when a customer makes a legitimate purchase using their credit or debit card but later disputes the charge with their bank, claiming it was unauthorized. This results in a chargeback, which is the reversal of the transaction, leaving the business without both the product or service and the payment for it.
The term “friendly” might suggest that this type of fraud isn’t harmful, but in reality, it’s far from harmless. Businesses, especially online retailers, often bear the brunt of friendly fraud, losing not only the sale but also incurring additional costs like chargeback fees and potential fines from payment processors. Over time, these losses can add up, significantly impacting the bottom line.
The Growing Prevalence of Friendly Fraud
Friendly fraud is on the rise, particularly with the increasing popularity of online shopping. According to a 2023 report by Javelin Strategy & Research, friendly fraud now accounts for approximately 60-80% of all chargebacks. This represents a significant increase from previous years, highlighting the growing challenge that businesses face in managing this type of fraud.
In 2023 alone, merchants lost an estimated $48 billion to friendly fraud globally, a figure projected to continue rising as e-commerce expands. The cost of friendly fraud extends beyond the lost revenue, with each $1 lost to fraud costing businesses an additional $3.75 when factoring in chargeback fees, lost merchandise, and other associated costs.
Causes of Friendly Fraud
Friendly fraud can happen for several reasons, and it’s not always a result of malicious intent. Here are some common causes:
Buyer’s Remorse: Sometimes, customers experience regret after making a purchase. Instead of returning the item or contacting the merchant, they might dispute the charge with their bank, claiming they never authorized the purchase.
Family and Friends: In some cases, a family member or friend might use the cardholder’s payment information without their knowledge. When the cardholder notices the charge, they may assume it’s fraudulent and dispute it, even if the purchase was made with good intentions.
Confusion or Forgetfulness: With the number of online subscriptions and recurring payments, it’s easy for customers to forget about charges on their statements. Studies find that nearly 30% of friendly fraud cases are due to customers not recognizing a charge on their credit card statement.
Intentional Fraud: Unfortunately, some customers take advantage of the chargeback system. They may knowingly purchase an item and then falsely claim they didn’t authorize the transaction, essentially getting the product for free. A study by Aite Group found that about 14% of consumers admit to having committed friendly fraud at least once.
The Impact on Business from Friendly Fraud
The impact of friendly fraud on businesses can be severe. Here are some of the ways it can affect a company:
Financial Losses: When a chargeback occurs, the business not only loses the revenue from the sale but may also have to pay chargeback fees. These fees can range from $20 to $100 per chargeback, depending on the payment processor. For businesses with tight profit margins, these costs can be devastating. On average, friendly fraud results in a 206% increase in loss per dollar compared to other types of fraud.
Inventory Loss: In addition to the financial loss, businesses often lose the product or service they provided. In cases where physical goods are involved, the merchant typically cannot recover the item, meaning they lose both the product and the payment. This is particularly damaging for retailers of high-value items.
Increased Risk of Future Chargebacks: If a business experiences too many chargebacks, it could be flagged as a high-risk merchant. This designation can lead to higher processing fees, stricter contract terms with payment processors, or even the termination of the merchant account. According to the 2023 Chargeback Field Report, 40% of merchants who experience excessive chargebacks end up on the MATCH list, a database of high-risk merchants.
Damage to Reputation: A high chargeback rate can also damage a company’s reputation. Payment processors and banks keep track of chargeback ratios, and if a business has too many, it may struggle to find a processor willing to work with them. In fact, a chargeback ratio above 1% can lead to penalties or termination of merchant accounts by most payment processors.
How to Prevent Friendly Fraud
Clear Communication: Ensure that your business name is easily recognizable on customer statements. A confusing or unclear descriptor can lead to unintentional disputes. Studies show that unclear billing descriptors are responsible for 52% of chargebacks due to friendly fraud.
Detailed Transaction Records: Keep thorough records of all transactions, including communication with customers, shipping information, and proof of delivery. This documentation can be invaluable when contesting a chargeback. Merchants who provide detailed evidence during the chargeback process see a 46% higher success rate in recovering funds.
Strong Customer Service: Encourage customers to contact your business first if they have an issue with a purchase. By resolving disputes directly, you can avoid the chargeback process altogether. A proactive customer service approach can reduce chargebacks by up to 30%.
Fraud Prevention Tools: Utilize fraud prevention tools like address verification services (AVS), card security codes (CVV), and 3D Secure authentication. These tools can help confirm the legitimacy of a transaction and provide additional evidence if a chargeback occurs. Implementing these tools can reduce fraud-related chargebacks by up to 70%.
Chargeback Management Services: Consider working with a chargeback management service. These companies specialize in helping businesses dispute and prevent chargebacks, saving you time and reducing the impact on your bottom line. Businesses using chargeback management services report a 32% decrease in chargebacks over time.
