The escalation of 'friendly' fraud in the digital age

In the modern era of online shopping, the convenience of digital transactions has brought about a new challenge for merchants: friendly fraud. This phenomenon, also known as chargeback abuse, occurs when consumers dispute legitimate charges on their credit cards, often resulting in significant financial losses for businesses. As e-commerce continues to grow, so does the prevalence of friendly fraud, making it a critical issue for merchants to address.

Friendly fraud, sometimes referred to as first-party fraud, happens when a customer disputes a charge on their credit card statement, claiming it was unauthorized or that the product or service was not as described. In reality, the purchase was legitimate, but the customer either forgot about it, didn't recognize the transaction, or intentionally sought to get their money back without returning the product. According to a 2020 report by FIS Global, friendly fraud accounts for as much as 70% of all credit card fraud, costing the industry over $132 billion a year.

The rise of e-commerce has made it easier for consumers to dispute charges. With the sheer volume of digital transactions, it's not uncommon for consumers to lose track of their purchases or forget about them altogether. "It's really quick and easy to check out, which is great for us as consumers," said Robert Painter, the vice president of global channel sales at Kount. "But it leads to a lot of transactions, and there's confusion".

Friendly fraud can be categorized into two main types: accidental and intentional. Accidental friendly fraud occurs when a customer genuinely forgets about a purchase or doesn't recognize it on their statement. Intentional friendly fraud, on the other hand, involves customers deliberately disputing charges to get products or services for free. This type of fraud is particularly challenging for merchants to combat because it often involves trusted customers who have a history of legitimate transactions.

The financial impact of friendly fraud on businesses is substantial. Not only do merchants lose the revenue from the disputed transaction, but they also incur additional costs such as chargeback fees and the loss of goods or services. According to Visa, friendly fraud can account for up to 75% of all chargebacks filed by cardholders. This makes it a significant burden for merchants, who must invest time and resources into fighting these disputes.

To mitigate the impact of friendly fraud, merchants can adopt several strategies. One effective approach is to use authentication tools such as Address Verification Service (AVS), Card Verification Value (CVV), and 3D Secure. These tools help verify the legitimacy of transactions and shift liability from the merchant to the card issuer in case of fraudulent chargebacks. Additionally, clear communication with customers can prevent accidental friendly fraud. Ensuring that transaction descriptions on bank statements are accurate and recognizable can help customers remember their purchases and reduce confusion.

Another important tactic is to provide excellent customer service and easy return policies. By responding quickly to customer inquiries and offering hassle-free returns, merchants can address customer concerns before they escalate to chargebacks. "Refund customers as quickly as possible and provide a clear return policy," advises Adyen, a global payment company. This proactive approach can help build trust with customers and reduce the likelihood of disputes.

Despite these efforts, completely eliminating friendly fraud is challenging. However, merchants can still take steps to protect their revenue and minimize losses. Chargeback representment, the process of countering a customer dispute with new evidence, is a powerful tool that merchants can use to contest illegitimate chargebacks and potentially win a reversal. By regularly defending against false claims, merchants can improve their reputation with banks and educate customers on the correct use of chargebacks.

Friendly fraud is a growing problem in the digital age, driven by the rise of e-commerce and the ease of disputing charges. While it poses significant financial challenges for merchants, adopting effective fraud prevention strategies and maintaining clear communication with customers can help mitigate its impact. As the landscape of digital transactions continues to evolve, merchants must remain vigilant and adaptable to protect their revenue from this pervasive threat.