As more businesses move towards digital payments and online transactions, they face a growing challenge: friendly fraud. Unlike traditional fraud, in which a criminal intentionally steals from a business, friendly fraud occurs when a customer disputes a legitimate charge. Despite its name, friendly fraud has the potential to do serious damage to businesses in the form of chargeback fees, lost revenue, and reputational harm. Friendly fraud isn’t as rare as you might expect: in one survey, 23% of respondents admitted to engaging in friendly fraud when they filed a dispute over a charge.

Understandably, businesses are concerned about the impact of friendly fraud on their bottom line. To combat friendly fraud, businesses are turning to a range of tools and strategies, including fraud detection software, chargeback management services, and dispute resolution processes. They are also focusing on improving their customer service and communication to ensure that customers are satisfied with their purchases and less likely to dispute charges.

With the right tools and strategies, businesses can mitigate the risk of friendly fraud and focus on growing in a safe and sustainable way. Here’s what you need to know about friendly fraud and how to safeguard your business against it – and how to respond when it happens.

What’s in this article?

• What is friendly fraud?
  
• How friendly fraud hurts businesses
  
• Types of friendly fraud
  
• How to prevent friendly fraud
  
• How to respond to friendly fraud
  

What is friendly fraud?

Friendly fraud, also referred to as "chargeback fraud" or "friendly chargeback fraud", is a type of fraud that occurs when a customer disputes a legitimate charge that they made on their credit card, debit card, or another payment method. Unlike traditional fraud, in which the perpetrator is typically an unknown third party, in friendly fraud, the customer initiates the transaction but later claims that the charge was fraudulent or unauthorised.

There are several reasons why friendly fraud occurs. Some of the most common reasons include:

• Forgetfulness
  One of the most common reasons for friendly fraud is forgetfulness. Customers may forget about a purchase that they made or fail to recognise a charge on their credit card statement. In these cases, the customer may dispute the charge, even though they made the purchase themselves.

• Misunderstandings
  Another common reason for friendly fraud is misunderstandings. Customers may misunderstand the terms and conditions of a sale or not understand the cancellation or return policy. This can lead to disputes and chargebacks.

• Unauthorised use
  Sometimes, friendly fraud occurs when a customer’s credit card or account information is stolen or used without their permission. In these cases, the customer may dispute the charge as fraudulent, instead of contacting their credit card company about the stolen card.

• Impulse buying
  Impulse buying can also lead to friendly fraud. Customers may make a purchase on a whim and later regret the purchase or change their mind about the product or service.

How friendly fraud hurts businesses

Friendly fraud is a growing problem for online businesses and has the potential to cause problems in multiple business areas. Some of the potential negative impacts of friendly fraud include:

• Financial losses
  One of the most significant impacts of friendly fraud is financial loss. When a customer disputes a charge and initiates a chargeback, the business loses the payment for the transaction as well as any associated fees and administrative costs. This can be especially damaging for small businesses, which may not have the financial resources to absorb these losses.

• Damage to reputation
  If customers think that a business is not responsive to their concerns or is not taking appropriate action to address disputes, they may post negative comments or reviews online. This can damage the business’s reputation with current and prospective customers, reduce the likelihood of future sales, hinder growth efforts, and lower customer lifetime value (LTV).

• Chargeback penalties
  Businesses with high chargeback ratios may face penalties from credit card companies and payment processors, such as higher fees or the termination of their account. This can be a serious threat to businesses and result in the loss of revenue and the need to find alternative payment processing solutions.

• Time and resources
  Responding to instances of friendly fraud can be time-consuming and resource-intensive. Businesses may need to gather evidence and documentation to support their claim, communicate with the customer, and respond to the chargeback or refund request. This can divert precious time and resources away from other business activities.

• Fraud prevention costs
  Implementing fraud prevention measures can also be costly for businesses, as they may need to invest in technology, software, and staff training to prevent and detect fraudulent transactions.

Types of friendly fraud

While friendly fraud can occur for a variety of reasons, there are two main categories of friendly fraud: chargeback fraud and refund abuse.

• Chargeback fraud occurs when a customer disputes a charge with their bank or credit card company, claiming that the charge was unauthorised or fraudulent. This can happen even if the customer made the purchase themselves and received the product or service as expected. The bank or credit card company will then initiate a chargeback process, which can result in the business losing the payment for the transaction and possibly incurring additional fees.

• Refund abuse occurs when a customer requests a refund for a product or service that they have received, but then keeps the product or continues to use the service. This type of fraud can be hard to detect, as it can be difficult for the business to determine whether the customer has actually stopped using the product or service. Refund abuse can result in financial losses for the business, as well as reputational damage if the customer posts about their experience online.

Both types of friendly fraud can be costly and damaging, and it’s important for businesses to take proactive measures to prevent and address them. Fortunately, there are a number of highly effective tactics and best practices that businesses can use to minimise this type of fraud.

How to prevent friendly fraud

Businesses that tackle friendly fraud consistently and comprehensively will put themselves in the best position to succeed. Here are some best practices that businesses can implement to prevent friendly fraud:

• Strong communication with customers
  Clear communication is key to preventing friendly fraud. Businesses should ensure that their customers are aware of their policies regarding cancellations, returns, and chargebacks. They should also provide clear online descriptions and photos of their products or services to avoid confusion.

• Clear billing descriptions
  Businesses should ensure that their billing descriptors are clear and recognisable to customers. This can help prevent disputes over unauthorised charges.

• Authentication
  Businesses can use authentication measures to verify customer identity and ensure that a customer is authorised to make a purchase. This can include requiring customers to enter a verification code sent to their email or phone number, or using multi-factor authentication.

• Order confirmation
  After a customer makes a purchase, the business should send them an order confirmation email that includes pertinent information about the transaction, including the date, time, and amount of the purchase. Order confirmation emails help customers remember the transaction and can prevent disputes later on, while also giving legitimate customers a chance to spot any potential fraudulent transactions as soon as possible.

• Customer service
  Excellent customer service can help prevent friendly fraud by ensuring that customers feel satisfied with their purchases and are less likely to dispute a charge. Businesses should be responsive to customer enquiries and complaints and work to resolve issues quickly.

• Fraud detection and prevention tools
  Businesses can use fraud detection and prevention tools to identify and prevent fraudulent transactions. These tools can include fraud scoring, IP address geolocation, and device fingerprinting.

By implementing these best practices, businesses can reduce the risk of friendly fraud and protect themselves and their customers. Because fraud is constantly evolving, it’s important that businesses stay vigilant and continually update their fraud prevention strategies. However, even with every mitigation measure in place, instances of friendly fraud can happen, so businesses should have a response plan in place.

How to respond to friendly fraud

When a business is hit with friendly fraud, it’s important to respond quickly and effectively to minimise financial losses, avoid penalties, and protect its reputation. By responding promptly, businesses can identify the reasons for disputes and chargebacks and implement measures to prevent similar disputes from occurring in the future – all while improving their customer service.

Here are some steps that businesses can take to respond to friendly fraud:

• Investigate the dispute
  When a customer initiates a chargeback or refund request, businesses should investigate the dispute to determine whether the reason is valid. This may include reviewing transaction records and customer communication.

• Provide evidence
  Businesses should respond promptly to chargebacks by providing all relevant documentation and evidence to support the transaction. Evidence can include details about the product or service provided, shipping records, and customer communication. Depending on what fraud detection and prevention provider you use, this stage of the process can either be arduous or easy. For example, Chargeback Protection with Stripe Radar doesn’t require businesses to do any additional work to provide documentation around disputes.

• Contact the customer
  Just as high-quality customer service and clear customer communication can prevent many chargebacks from happening in the first place, they can also help resolve chargebacks once they happen. In a case of friendly fraud, businesses should get in touch with the customer to try to resolve the dispute. This may involve providing additional information or evidence to support the validity of the transaction, or offering a refund or exchange to resolve the issue.

• Use chargeback representment
  If the business has sufficient evidence to support their claim, they can use chargeback representment to dispute the chargeback with the issuing bank or credit card company. This process requires that businesses submit evidence and documentation to the bank or credit card company to support the validity of the transaction.

• Improve fraud prevention
  In addition to responding to friendly fraud, businesses should also work to improve their fraud prevention measures to prevent future instances of friendly fraud. This may involve implementing fraud detection and prevention tools, improving customer communication and service, and providing clear billing descriptions.

To learn more about how Stripe’s Chargeback Protection helps businesses prevent and combat friendly fraud, go here to get started.