Friendly fraud, also known as first-party fraud or chargeback fraud, is one of the biggest threats to businesses in terms of fraud. Not only because of the increase in the past years but also because of the negative impact chargebacks have on revenue. Friendly fraud is increasing 20% per year and taking $4 billion in revenue from businesses around the globe.
Friendly fraud is when a customer purchases a product or service and later claims it’s fraudulent or unauthorized even though it wasn’t. The main difference between friendly and traditional fraud is that friendly fraud often isn’t intentional.
Eliminating friendly fraud can be challenging as it’s difficult to prove the customer did it with the intent to commit fraud. However, you can reduce its impact and protect your revenue with the right tools and necessary actions.
In this blog post, you'll discover:
What is friendly fraud?
Friendly fraud vs. chargebacks
Types of friendly fraud
Friendly fraud consequences
How to prevent friendly fraud
What is friendly fraud?
Friendly fraud is when a customer commits fraud by (accidentally or purposefully) requesting money back from a business for a purchase without a legitimate reason.
There are two approaches to committing friendly fraud:
Chargeback fraud: When a customer files an illegitimate chargeback. For instance, they buy something from a business and initiate a chargeback without a legitimate reason.
Refund abuse: When a customer buys a product, claims they haven’t received it (even though they have), and gets their money back.
Friendly fraud vs chargeback fraud
Chargeback fraud is a type of friendly fraud when a customer files an illegitimate chargeback. A chargeback is when a customer disputes a charge on their account statement after completing a card payment. Although chargebacks offer an easy way to reverse suspicious transactions and protect cardholders from fraud, they're often used to commit friendly fraud. 75% of chargebacks are due to friendly fraud, and most happen for card-on-file transactions.
When a customer files a chargeback, the payment is reversed. Once approved, the customer receives the transaction amount back in full. Although businesses have a chance to defend themselves if they disagree with the chargeback claim, chargebacks put their revenue at risk, especially as friendly fraud increases.
Check out our payments fraud blog to learn about other types of fraud and how to prevent them.
Types of friendly fraud
There are multiple reasons why friendly fraud may occur, but not all of them are malicious. Below, you can find the most common reasons.
Accidental friendly fraud/confused customer
Accidental friendly fraud is when a customer makes a purchase and forgets about it or doesn't recognize it on their bank statement. If this happens, they might assume they were charged for something they didn't buy and initiate a chargeback. This is quite common for subscription businesses. Customers sometimes sign up for subscriptions and forget about it. Then, a year later when it’s renewed they don't recognize the transaction and issue a chargeback.
Customers have certain expectations when they buy a product based on how the business portrays it. If the product doesn’t meet these expectations, they might feel dissatisfied. In some cases, they might even feel tricked by the company which can result in the customer initiating a chargeback rather than a return. One example of this is if a customer buys a clothing item online that doesn’t quite match the description of the product on the website.
Family fraud is when one family member buys something without the knowledge of another, and the second family member initiates a chargeback. One example is when a child takes their parent's credit card and buys something without their knowledge. This could for instance be an in-app purchase for a video game. Parents can often solve this by contacting the business. However, if the parent doesn't have the full context, they might initiate a chargeback and be accountable for friendly fraud.
Discover more types of fraud in our payment fraud blog post.
Friendly fraud consequences for businesses
Friendly fraud consequences can be damaging to your business in terms of impact on revenue and reputation. It's essential to be aware of the consequences of friendly fraud to understand the impact.
The most significant consequence of friendly fraud is its impact on your revenue. With every friendly fraud chargeback, the business loses revenue from the original transaction and, most likely, the merchandise.
Chargebacks are expensive for businesses. With every chargeback, regardless of if it’s fraudulent or not, the business needs to pay a chargeback fee ranging between $5-100. Acquiring banks issue chargeback fees for all chargebacks to cover the administrative expenses for processing a chargeback. This means that you lose the money from the transaction and need to pay an additional fee.
Products or services that don’t meet customers’ expectations can lead to customers having a negative association to the business. If dissatisfaction is the reason for friendly fraud, the customer might have a negative there is a chance that the customer also leaves a bad review or speaks negatively about the company, causing reputational harm.
How to prevent friendly fraud
As long as there is the option to file chargebacks, there will always be the possibility of friendly fraud. Even though eliminating friendly fraud completely can be difficult, there are some things you can do to reduce its impact on your revenue. These include:
Use authentication tools like (AVS), card security codes (CVV), and . 3D Secure allows businesses to protect themselves from fraudulent chargebacks through a ‘’liability shift’’ from the business to the card issuer
Build a risk system that can recognize patterns and identify friendly fraudsters, for instance shoppers that have initiated multiple disputes and chargebacks across different cards and identities
Blocked lists: Create a list of blocked customers that pose a threat to your business
This is especially beneficial for confused customers and includes: 25% of disputes could be prevented with more details.
Ensure the merchant description on the bank statement is clear, accurate, and matches the customer-facing one
Respond to any customer questions quickly
Alert your customers if a product is out of stock as soon as possible
Provide detailed product descriptions on your website
Refund customers as quickly as possible
Provide a clear return policy
Make sure your contact information is accessible so customers can contact you in case of doubt
Ensure your product matches your customer's expectations to avoid dissatisfied customers
Set expectations when it comes to delivery time and keep your customers updated. Let your customers know if there are delays
Compensate your customers proactively if you can't deliver on time
Track your goods and ask your customer to sign when they receive the package for extra security
Build an effective risk strategy
Addressing friendly fraud is paramount for businesses that want to safeguard their revenue. Recognizing its threat and implementing effective measures, such as using appropriate tools and making the right changes to improve communication, expectations, and returns, can significantly mitigate the risk. By staying vigilant and proactive, businesses can motivate their customers to respond with other alternatives rather than chargebacks and protect themselves from the impact.
At Adyen, we’re always available to advise you on how to build a risk strategy that mitigates the impact of friendly fraud. Our platform offers various tools to support and protect your business from payment fraud. With our RevenueProtect tool, they can tackle the challenges of friendly fraud and protect their revenue.
Check out our three-part fraud prevention blog series to discover how to protect your business from fraud.