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What is a Friendly Fraud chargeback?

As an E-commerce merchant, you’ve probably encountered the term “friendly fraud” a few times before, but may not be entirely certain what it entails. The term refers to fraudulent or inappropriate action taken by the legitimate cardholder, as opposed to traditional fraud which occurs when a thief illegally obtains another person’s credit card information and uses it to make fraudulent purchases.

Friendly fraud specifically refers to a customer’s inappropriate misuse of the chargeback system. Typically, the option to file a chargeback exists for circumstances when a cardholder discovers that their credit card details have been stolen and the thief used them to make fraudulent purchases, and the chargeback prevents the cardholder from having to pay for the thief’s actions. In cases where the original purchase was made legitimately by the cardholder but they are dissatisfied with the transaction, their first recourse should be your business’s return and exchange policy. If the customer makes no effort to contact your company for a refund and instead jumps straight to issuing a chargeback with their bank, this is an example of friendly fraud.

Not all friendly fraud is malicious. Cases in which the cardholder honestly doesn’t recognize a legitimate charge are considered benign friendly fraud, in contrast with hostile friendly fraud cases where the customer knowingly files a chargeback on a transaction they recognize because they want to keep both the product they purchased and the money they paid for it. There are a number of common reasons for friendly fraud chargebacks, including:

  • The customer claims their online purchase never arrived or wasn’t delivered.
  • The customer canceled an order, but their account was still charged.
  • The customer claims they were promised a refund for a returned item but never received it.
  • The customer asserts that the quality of the item they received was not as expected or promised.
  • The customer forgot they made the purchase or failed to recognize the transaction on their card statement.

In most or all of these cases, the right thing for the cardholder to do would be to contact your business first and give you the opportunity to make the situation right. Even if you lose out on a sale, having to issue a refund is better than being hit with a chargeback. The financial institutions that provide merchant accounts tend to view chargebacks harshly for the merchant involved, because those institutions don’t want to open themselves to excessive financial risk. When your business is hit with a chargeback, you face a number of possible consequences:

  • You lose not only the money from the sale, but also the merchandise or service you provided in exchange for that money.
  • You have to pay additional chargeback fees.
  • If you dispute the chargeback (and in many cases, you should), this costs your business additional overhead expenses.
  • With enough accumulated chargebacks within a given period of time, you may be at risk of being classified as a high-risk merchant, which can mean higher processing fees, additional and more stringent rules, the requirement to maintain a rolling reserve instead of having immediate access to your income, and in the worst case, the cancellation of your merchant account entirely and the loss of payment processing options altogether.

While you will never completely eliminate friendly fraud, there are a few important steps you can take to protect your business from this kind of chargeback.

  • Have a clear and easy to find exchange, return, and refund policy posted on your website.
  • Ensure your customer service team is quick to properly respond to customer complaints 
  • Keep an organized paper trail of invoices, delivery notices, etc. in the event you need to provide evidence in a chargeback dispute.
  • Maintain an efficient tracking and shipping system for online orders, to help verify when an item is successfully delivered and received by the customer.
  • Keep an account order history that shows all of a customer’s previous transactions.
  • Make sure the “DBA” or “billing descriptor” that your customers see on their credit card or bank statement is very clear and concise reflecting your proper company name or website, along with the correct phone number to call should they not recognize or remember the sale. 
  • Make sure you are always verifying the customers delivery address automatically through your gateway Address Verification Settings (AVS) as well as the CVV (card security code) . 

For more tips and advice on how to help prevent friendly fraud contact an expert sales manager at Durango Merchant Services!