Merchants looking to reduce the impact chargebacks have on their business can benefit from reviewing their management of ‘friendly fraud.’ These types of chargebacks occur when a customer actually receives the goods or services they have purchased, but claims they didn’t. While it’s also important that merchants try to cut down on chargebacks from the other main causes, true fraud and merchant error, fighting chargebacks of this type is typically easier to accomplish.
In the case of true fraud, such as a purchase made using a stolen credit card, optimizing your fraud filters is key. To reduce merchant-error chargebacks, review your transaction stream and ensure it flows efficiently and error-free.
Friendly fraud chargebacks are a different animal, in that they are typically more complicated to deal with. Because the friendly fraudster appears to be like any other customer until they commit friendly fraud, security defenses that work against true fraud won’t be as effective against friendly fraud. To combat friendly fraud, you must examine each case separately on its own merits.
As a result, building an effective strategy for dealing with friendly fraud must take into account the complexities of chargebacks from this source. While true fraud and merchant error chargebacks should not be fought, as they are considered by card issuers to be the merchant’s responsibility/liability, friendly fraud chargebacks should be contested, otherwise your business is at threat of losing revenue.
Friendly Fraud Chargeback Categories
The phrase friendly fraud covers all chargeback submitted on the basis of baseless or fraudulent claims. This includes the following three main categories of claims:
- Customer Confusion: These claims stem from customer confusion or forgetfulness about what they ordered and whether they actually received it. While these claims are invalid and should be contested via representment, they don’t represent intentional fraud – the customer may have received a product and simply forgotten they did so or it may have been misplaced by another member of their household. Another case might be when the merchant identifier on the credit card isn’t familiar to the customer and they mistakenely believe the charge is invalid.
- Intentional: In these cases of chargeback fraud the customer knows what they are doing and hopes to abuse the chargeback system to, in effect, “have their cake and eat it too.” These fraudulent claims typically involve a denial of receipt, or a false claim that they never made the order in the first place. In some cases, they may be motivated by customer dissatisfaction with a product or service. In these cases, instead of returning the product, the customer attempts to abuse the system by keeping the product and trying to get their money back.
- Family: In these cases, another family member may have placed an order for goods or services, in which case the owner of the card may feel justified in trying to use the chargeback system to get their money back.
Tips for Managing Friendly Fraud Chargebacks
While the underlying reasons may differ, friendly fraud chargebacks should be opposed via representment in order to recover the revenue at stake.
In the representment process, the merchant contests the chargeback with the issuing bank, presenting evidence to show that the chargeback is invalid and should be reversed. If the bank finds the merchant’s evidence compelling, they will return the funds spent on the purchase to the merchant.
Because chargebacks for true fraud and merchant error are the merchant’s liability, it’s important to first determine what type of fraud you are dealing with when deciding whether to contest a chargeback. Every chargeback features a reason code that can help you determine whether or not friendly fraud is involved. In cases where the circumstances are contrary to the claimed reason, it warrants further investigation as potential friendly fraud.
For instance, if the reason code cites failure to deliver a product, and you have documentation proving that the product was in fact delivered, this can indicate a case of friendly fraud. To fight this chargeback, you would want to send in proof of delivery in the representment process. Representment rules and policies differ by card network, so it’s important to familiarize yourself as much as possible with these rules when submitting evidence. Success in overturning chargebacks is possible, but it takes painstaking attention to detail and time and effort to compile the evidence necessary to prove that a chargeback was fraudulent.
Strategies for Preventing Friendly Fraud Chargebacks
While friendly fraud must be combated on a case-by-case basis, there are steps you can take to improve your defenses against these types of chargebacks.
To reduce chargebacks from customer confusion, select easily recognized merchant descriptors. It’s also beneficial to send out confirmations before and after an order to make doubly sure that the customer really wanted to make the purchase.
Chargebacks that stem from family fraud or from delays or mistakes in the delivery process can in some cases be avoided by taking a proactive approach to customer service. If you train your staff to be responsive to customer concerns and make it easy for customers to contact customer service, you can nip many chargebacks in the bud. A generous return policy can also be helpful, especially given that providing returns is always less expensive than incurring a chargeback.
To combat intentional friendly fraud, preventing individuals who engage in this type of activity from doing further business with your company can be the best way to prevent future chargebacks from that source. This is because while you can’t predict a friendly fraud attempt, these attacks often come from existing customers
Managing Friendly Fraud Chargebacks
The varied types of friendly fraud cases means that automated systems can’t handle this type of fraud alone. As a merchant, developing a strategy to defend against friendly fraud is crucial to preventing fraudsters from negatively impacting revenue. If you don’t oppose these chargebacks, it only encourages fraudsters to continue to launch false claims against your business.
Besides training your staff to help prevent chargebacks as much as possible, taking the time to investigate and represent invalid chargebacks when you identify them is necessary to optimize your chargeback management efforts. Additionally, to fight back against friendly fraud chargebacks, it’s vital to collect good transaction data to support your representment cases.
Given the complexity of dealing with friendly fraud, one option for handling these claims is bringing in a chargeback management firm to assist your efforts. Experts in the field of managing chargebacks can help you design and implement a strategy for dealing with friendly fraud in a cost-effective way.