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What To Know About Friendly Fraud

While online transactions have done much to help retailers and consumers alike, the technology has also opened up avenues for new kinds of fraud. Some instances of fraud are perpetrated by criminals against merchants. Others, though, occur through preventable mistakes. The prime example of the latter is what is known, somewhat ironically, as “friendly fraud”.

Online merchants, especially those operating small businesses, should take precautions and educate themselves on what friendly fraud online looks like in order to protect themselves.

How Friendly Fraud Occurs.

Friendly fraud owes its existence to the Truth in Lending Act, which equips consumers with protection from illegitimate charges on credit or debit cards through “chargebacks”. A cardholder reports an unwarranted charge to their provider, who issues a chargeback to the merchant to demand a refund. The problem is that the act was created well before e-commerce was even a concept. In a day when purchases can occur quickly, remotely and sometimes with difficulty in verification, mistakes or misunderstandings can lead to well-meaning customers reporting for chargebacks on what are actually legitimate transactions.

Distinctions Between “Friendly” and “True” Fraud.

Though fraud is not something most people would consider friendly, the term is sometimes used to specifically designate cases where an honest mistake is made. A family member may use a card to purchase something then fail to inform the holder, or a cardholder could make a purchase that they then forget about it later. “Chargeback” or “true” fraud is the term used, then, for cases where someone deliberately abuses chargebacks to get refunds on purchases they knowingly made, sometimes with stolen card info.

Either way, issuers often are required to take chargeback requests at face value, so it becomes important for merchants to learn how to reduce chargebacks as they may struggle with the process of disputing them, and simply relent and pay the refund.

Stopping Friendly Fraud.

Often, friendly fraud comes down to lapses in communication between merchants, consumers and issuers. A good strategy for preventing friendly fraud caused by consumer error is to make transaction information easily understood—unambiguous descriptors on billing statements, clear terms of agreement on payments due, and emailed purchase receipts for record-keeping. Open communication — with customers through customer service and with issuers through tools like Ethoca that facilitate sharing transaction info — is also vital for both resolving disputes and preventing them in the first place.

Friendly fraud, however unintentional, represents an increasing loss of revenue for online merchants, but it’s not insurmountable. With a better understanding of e-commerce channels and better handling of transaction data, merchants can cut these losses and provide better service for their customers.

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