Some chargeback fraud can be referred to as friendly fraud just because a customer doesn’t understand there is an easier process to go through then just directly to their bank. They don’t understand the differences between regular payment returns and refunds issued by the bank.
Then there are other types of chargebacks that come from malicious consumers trying to abuse any loop hole that may be available within the guidelines of handling chargebacks. These are consumers that knowingly stealing product or money right out from under your business.
Both types of fraud involve filing an undeserved chargeback, and both have the same end effect. Whether through ignorance or intent, procuring a refund while retaining the goods or services purchased amounts to cyber shoplifting.
Friendly fraud vs. True Fraud
The primary difference between friendly fraud and what is labeled “true” fraud lies in the identity of the fraudster. True fraud, also known as identity theft, starts with a credit card stolen from the authorized user. Once the theft is discovered, the account is closed, and a new card number is issued to the customer.
In the case of friendly fraud, the fraudster is the cardholder. It could be the person whose name is on the card, or someone authorized to use the cardholder’s account, such as a family member. Either way, a transaction was authorized, got past fraud protections, and seemed to be a legitimate purchase. The customer files a chargeback, attempting to regain the transaction dollar amount yet holding on to the product or services rendered.
There are many claims fraudsters can offer as reasons for filing a chargeback. Some of the most common include:
- The item or service wasn’t delivered.
- The item or service wasn’t as described (counterfeit, wrong color, subpar, etc.).
- The merchant didn’t cancel the customer’s recurring payment when requested.
- The original transaction wasn’t authorized by the cardholder.
As you can see, whether innocent or intentional, the outcome of friendly fraud is bad news.
Additional Costs of Friendly Fraud
While friendly fraud almost exclusively involves online purchases, it may help to consider a similar scenario in a brick-and-mortar store: regardless of whether a customer is deliberately shoplifting or simply walks out of the store holding some forgotten item, the merchant will have the same loss–at least in terms of merchandise.
With internet purchases, however, things get worse. For starters, friendly fraud happens after the fact. There’s is no chance that your Loss Prevention team will catch the perpetrator sneaking out with merchandise tucked under a coat or in a purse. Friendly fraud doesn’t manifest itself for weeks or even months after the transaction.
There are other losses that go beyond simply the cost of goods:
- Chargeback fees will be levied.
- Shipping costs will be lost.
- Transaction processing fees go to waste.
- Time and money will be required to dispute charges.
…and much, much more. In fact, recent studies show you can expect to lose an average of $2.94 in revenue for every dollar lost to fraud. Businesses that fall under the category of “high risk” stand to lose even more. But much of this loss is avoidable, as we shall see.