Friendly Fraud: What Is It & How Do You Stop It?

There’s nothing “friendly” about friendly fraud, despite what the name implies. This deceptive practice is far from amicable; it costs online retailers over $132 billion annually—a figure that doesn’t account for additional losses from refunded goods and services. Alarmingly, a recent survey revealed that nearly three-quarters of merchants experienced an average 18% increase in friendly fraud over the past three years, underscoring the growing urgency of this issue.

While online fraud executed by bad actors is a well-known challenge in the eCommerce space, even legitimate customers can inadvertently contribute to significant losses. Whether through misunderstandings or intentional/unintentional misuse of return policies, these actions can harm a business’s bottom line. The good news is that with the right measures in place, these challenges can be effectively mitigated.

Understanding these dynamics is crucial for merchants aiming to protect their operations and thrive in the competitive online marketplace. This article delves into the complexities of friendly fraud, its implications for businesses and actionable strategies to combat this pervasive challenge.

What Is Friendly Fraud?

Friendly fraud occurs when a cardholder disputes a transaction despite the card not being stolen. Unlike genuine card-not-present (CNP) fraud, where criminals use stolen card details for unauthorized purchases, friendly fraud involves the legitimate cardholder. 

It can take several forms, such as “family fraud,” where a family member, like a child, uses the card without permission—for instance, making app purchases through a parent’s account. Another form, often called “first-party fraud,” happens when a cardholder unintentionally files a chargeback, perhaps forgetting they made the purchase. In some cases, friendly fraud is intentional, with the cardholder falsely claiming a legitimate transaction was unauthorized to receive a refund.

Regardless of the scenario, friendly fraud is particularly difficult for businesses to dispute. Proving whether a transaction was intentional, an honest mistake, or unauthorized by someone close to the cardholder can be a complex and resource-intensive process.

Five Examples of Friendly Fraud

The most common types of friendly fraud include:

1. Accidental friendly fraud: The customer forgets about a purchase or fails to recognize a transaction on their bank statement. As a result, they may mistakenly dispute the charge, believing it to be unauthorized. This type of fraud is particularly common with subscription services, where customers may forget they signed up for recurring payments.
2. Intentional friendly fraud: The customer knowingly disputes a legitimate transaction to receive a refund while keeping the purchased item. This can involve tactics such as double dipping, where the customer seeks both a refund and a chargeback for the same purchase. 
3. Merchant error: Misunderstandings may arise from merchant practices, such as unclear billing descriptors or delivery issues. Customers may initiate chargebacks due to dissatisfaction with the transaction experience rather than malicious intent. For instance, if a product does not match its description or arrives late, customers might seek refunds through chargebacks.
4. Family fraud: A family member, often a child, makes a purchase using another family member’s payment information without their knowledge. The unaware family member may later dispute the charge, thinking it was fraudulent.
5. Refund abuse: The customer requests a refund for products or services they have received and continue to use them. They exploit lenient return policies, taking advantage of merchants’ willingness to process refunds without returning the item.

Consequences of Friendly Fraud for Your Business

When customers bypass refund policies and dispute charges directly with their banks, merchants incur chargeback fees, typically ranging from $15 to $50. Additionally, they have only 45 days to contest a chargeback, and the process can be complex, often favoring the cardholder unless strong evidence is presented.

Maintaining a low chargeback ratio is also essential for protecting profit margins. Beyond chargeback fees, businesses must also consider costs related to shipping the original item and other operational expenses. 

To mitigate these risks, businesses should actively monitor their chargeback ratios and implement strategies to prevent friendly fraud. Proactive management is key to safeguarding revenue and ensuring long-term financial health.

How to Prevent Friendly Fraud

Merchants can adopt several proactive strategies to effectively combat friendly fraud. Although they often find themselves at a disadvantage during disputes, there are key practices that can help minimize risks. Friendly fraud prevention closely aligns with standard chargeback and refund fraud prevention, focusing on verifying the identity of the cardholder to ensure they are a legitimate customer.

Here are some essential practices to consider:

• Identity Verification: Utilize digital footprint analysis and device-related data to confirm customer identities and intentions in order to establish a clear connection between the customer and their transaction.
• Record Keeping: Maintain detailed records of transactions and customer interactions; documentation can be invaluable when disputing chargebacks.
• Monitoring Patterns: Keep an eye out for suspicious behaviors, such as frequent refund requests from the same customer, which might indicate potential friendly fraud.
• Customer Communication: Provide accessible channels for customers to reach out with concerns before they resort to chargebacks. Clear communication can often resolve issues amicably.
• Refund Policy Adjustments: Consider refining your refund policies to reduce opportunities for chargebacks. For example, request specific evidence from customers or ask for returns in cases of disputes.

By implementing these strategies, businesses can reduce the likelihood of friendly fraud and protect their revenue.

How SEON Helps Combat Friendly Fraud

With advanced technology and a comprehensive approach that detects and prevents fraud at every step of the customer journey, SEON enables merchants to verify identities in real time. Here’s how SEON’s solutions help businesses effectively combat friendly fraud:

• Digital Footprint Analysis & Device Intelligence: Assess customer identities based on their online behavior, social and digital profiles and device characteristics.
• Continuous Activity Monitoring & Behavioral Tracking: Monitor all transactions and user activity prior to purchases to spot behavioral patterns indicative of friendly fraud and recognize repeat offenders and unusual refund requests.
• Customizable Rules: Set up tailored rules to flag suspicious activities and automate responses based on previously identified fraudulent behaviors.
• Machine Learning-Enhanced Detection: Spot patterns and anomalies the human eye might fail to recognize and implement machine learning-suggested rules based on your historical data to finetune your defense.

SEON empowers businesses to take control of chargeback processes and reduce the incidence of friendly fraud. By leveraging real-time data and machine learning insights, merchants can enhance their fraud prevention strategies while maintaining a seamless customer experience.

Frequently Asked Questions

You might also be interested in reading about:

• SEON: Guide to Chargeback Fraud: Detection and Prevention
• SEON: 8 Best Fraud Detection Software and Tools in 2024
• SEON: Top 10 Chargeback Management Software Solutions

Learn more about:

Digital Footprinting | Browser Fingerprinting | Device Fingerprinting | Fraud Detection with Machine Learning & AI

Sources:

• Qredible: In-App Purchases: Consumer Protection Rights in the UK
• Expert Market: Chargeback Fraud Statistics 2021: Everything You Need to Know About Chargeback Fraud
• Justice – United States Department of Justice: New Orleans Man Sentenced To Six Years in Prison for Charges Related To Credit Card Fraud Conspiracy
• Razorpay: Here’s Why Blacklisting Customers Is Bad for Your E-Commerce Business