Friendly Fraud Part 1 – Understanding and identifying chargeback fraud

Friendly fraud, also known as chargeback fraud or digital transaction fraud, is a common problem faced by modern businesses. This type of fraud affects both online and physical stores and is widespread across industry sectors. While the terms ‘friendly fraud’ and ‘chargeback fraud’ are often used interchangeably, the intention behind each incident differs greatly and affects how you need to respond. It’s important to understand why friendly fraud happens, what to look out for, and what you can do about it to protect your business.

What is friendly fraud?

Friendly fraud occurs after a customer has purchased goods or services with their own credit card. Once the goods or services have been received by the customer, they make a request to the issuing bank to cancel the financial transaction. If the chargeback is successful, the funds are sent back to the customer and the merchant is made accountable. While this situation is obviously not ideal for business owners, it’s important to understand the intentions behind these events and act accordingly.

Friendly fraud vs honest chargebacks

Before you can look out for friendly fraud, it’s important to understand why it happens in the first place. Not all chargeback events can be referred to as ‘fraud’, and not all fraud has an obvious malicious intent. Credit card networks characterize chargebacks in multiple ways based on specific reason codes. There are currently 151 such codes in operation across the United States, some of which involve fraud and while others do not.

Fraud reason codes cover all fraudulent activity, including authorization discrepancies and EMV liability shift issues. Non-fraud reason codes typically include customer disputes, including issues with product or services, issues with shipping, and recurring billing chargebacks. While the term ‘friendly fraud’ is used all the time, it lacks a clear definition. Some cases may involve an honest mistake, and others may involve intentional deception.

In fact, the only common factor between cases is the lack of clarity. In most cases, communication with your customers is the key to revealing fraud. When chargeback fraud takes place, customers will typically try to avoid contact with you altogether. In contrast, when an honest chargeback is made, the customer will usually attempt to contact you and remain transparent throughout the process.

As a business owner, it’s important to focus on your products, services, and customer support to reduce non-fraudulent chargebacks. Even when a chargeback is based on customer error, there may be something you can do to make the transaction process more transparent. Additionally, it’s important to integrate internal and external payments systems in order to recognize the warning signs of fraud. Developing a relationship with a payments processing partner is the best way to reduce dishonest chargebacks and protect yourself for the future.

How to manage different scenarios

Fraud is defined as a dishonest and illegal act perpetrated for financial advantage. Because the act of fraud involves deception and lack of transparency by definition, individual businesses often need help when it comes to defining and managing specific events. Most friendly fraud incidents fall into one of the following three scenarios:

Malicious fraud – Dishonest acts performed with the sole intent of gaining financial advantage. While these incidents may be disguised as friendly, this is the fraudulent part of ‘friendly fraud’.

Honest mistakes – Errors by customers may be characterized as fraud but come from good intentions. While these incidents may seem dishonest, this is the friendly part of ‘friendly fraud’.

Honest chargebacks – Systematic internal errors or quality issues due to problems with goods and services, problems with shipping, or problems with recurring billing systems.

In order to manage these scenarios, it’s important to follow a thoughtful and considered approach. First and foremost, it’s important to produce high quality goods and services to keep your customers happy. In addition, it’s essential to organize fast and reliable shipping and transparent communication throughout the transaction and delivery process.

Next, it’s important to develop sound internal processes to prevent problems and notice them quickly when they develop. Last but certainly not least, it’s essential to develop a working relationship with a payments processing partner to enable tight financial integration and real-time alerts when chargebacks occur.

Explore a relationship with Pinpoint today. As a trusted payment processing partner and former frontrunner in fraud and chargeback management, we have the tools to keep your business successful.