André Futuro
Often referred to as “innocent fraud,” friendly fraud happens when customers dispute a legitimate purchase. Friendly fraud can be benign – when the customer honestly believes they didn’t make the purchase – or it can be malicious, where the customer is trying to get something for nothing. Either way, friendly fraud can have a serious effect on a business’s bottom line. Unfortunately, it’s a bigger problem than businesses might think.
How Serious Is Friendly Fraud?
Friendly fraud has been a long-standing ecommerce issue, but it took on new life with the pandemic. Consumers who were locked down with no choice but to shop online took to ecommerce websites and were making purchases right and left.
Of course, when customers received statements that reflected their activity, many were unfamiliar with the purchase or simply had buyer’s remorse. The result was a significant increase in friendly fraud. In fact, ecommerce businesses reported a 28% increase in friendly fraud between 2019 and 2022.
This type of fraud isn’t a victimless crime; in fact, it affects customers, businesses, and customers alike. Here’s what happens when customers game the system — whether unintentionally or not — and how businesses can help stop the practice.
The Effect of Friendly Fraud on Businesses
Businesses bear much of the burden when it comes to friendly fraud. With every friendly fraud incident, businesses stand to lose:
- The products or services sold when a customer fraudulently disputes a legitimate transaction
- The fulfillment costs associated with processing and completing the order
- The packaging and shipping costs
- The expensive chargeback fees
- The resources dedicated to researching, collecting evidence, and disputing the resulting chargebacks
Friendly fraud can damage customer relationships
Friendly fraud can also affect customer loyalty. Businesses may feel they need to appease longtime customers who have committed friendly fraud, believing it’s easier to write off the cost of an instance of friendly fraud rather than risk the negative social media response and reduced lifetime value of a customer. Unfortunately for businesses, accepting friendly fraud may serve to only encourage future bad behavior.
Friendly fraud prevention can increase false declines
Another unintended consequence of the rise in friendly fraud for businesses is a dramatic rise in false declines. False declines — sometimes called “false positives” — happen when a customer’s valid order is declined because the business mistakes it as fraudulent.
Many ecommerce businesses leverage automated fraud detection solutions that count on strict fraud filters and simple fraud detection rules. But as friendly fraud rises and legitimate transactions with no red flags are increasingly marked as fraudulent, a business’s systems begin believing that these legitimate transactions are actually fraudulent, skewing fraud models and increasing the false decline rate.
Even worse, once a customer experiences a false decline, that customer is likely to take their business elsewhere, never to return — adding to a business’s financial losses.
For example, our original research on consumer attitudes revealed that 41% of customers will never shop on a site again after they’ve experienced a false decline, and 32% will take their complaints to social media, potentially creating a negative reputation for the company.
Another data point to consider: As much as 65% of declined transactions are actually legitimate orders. This can mean big trouble for a company’s bottom line when they’re turning down sales from perfectly good customers.
Friendly fraud has a significant impact on banking institutions and processors.
How Card Issuers Handle Friendly Fraud
Businesses aren’t the only ones to feel the effects of friendly fraud. Banking institutions and processors are also mindful of customer loyalty and don’t want to jeopardize that relationship by refusing to refund a disputed transaction amount — even if it’s a clear case of friendly fraud.
Current regulations require an issuer to immediately credit customers the disputed transaction amount — even before an investigation into a dispute begins — causing short-term losses to an issuer’s cash flow.
To help processors address these challenges, issuers have updated their policies, such as the new Visa Friendly Fraud Rule. The new rule gives ecommerce businesses more options when presented with a chargeback to help them truly discern what is happening.
Customers Are Impacted by Friendly Fraud, Too
Although it seems like consumers hold all the cards when it comes to friendly fraud, they’re ultimately affected also.
In innocent cases of friendly fraud, customers become frustrated when they have to go online or wait on the phone for a customer service agent to get more information about an unknown transaction. If they still don’t recognize the transaction and believe they’re a victim of fraud, customers may cancel their credit card altogether — leaving them in a financial bind as they wait for a replacement card and scramble to update the recurring billing charges.
Even in the cases of hostile friendly fraud, the customer still loses. They may think they got something for nothing, but in the end, there’s still a cost.
Businesses may have to increase product prices to compensate for the increased costs of false declines and chargebacks, while issuers may also need to raise their fees and interest rates to protect themselves against expected future losses.
What Businesses Can Do to Prevent Friendly Fraud
Because friendly fraud starts as a legitimate purchase, traditional fraud prevention tools are generally unable to detect and prevent any instances of friendly fraud. And that can make it easy for businesses to believe they’re powerless against preventing it. But by incorporating smart strategies like those below, businesses can minimize the impacts of friendly fraud on their business.
Keep detailed transaction records
By keeping detailed purchase history information — like the details of when, where and how a purchase was delivered, activated or downloaded — businesses can offer customers the information needed to jog memories regarding the legitimacy of a transaction.
Create household profiles
Businesses can use historical data to create household profiles that include device IP addresses, purchasing habits and device types to prevent purchase disputes and increase the likelihood of winning a chargeback.
Deliver a superior customer experience
Make the customer’s shopping experience memorable by establishing a foundation of trust. The more customers believe they will receive an honest answer from a company, the more likely they are to reach out to the company first. You can establish this relationship by from the moment an order is placed. Maintain communication with the customers by providing text, email or DM confirmations. Keep them updated and manage expectations for shipping and delivery times. Ask for feedback with a simple online survey. Find ways to keep the customer engaged.
Make return and refund policies clear
Include links to easy-to-understand return and refund policies throughout websites, including on product pages, checkout pages, and order and delivery confirmations. Customers are less likely to initiate disputes when these policies are placed in obvious locations.
Create better product descriptions and depictions
Review product descriptions to make sure they are clearly understood and are an accurate reflection of the product. Consider investing in high-definition product photos and online displays that allow customers 360-degree views and zoom capabilities. If possible, look at AI-enabled product representations that allow customers to “try on” and view products in use.
Implement a robust fraud prevention solution
Even businesses that implement these solutions may still find themselves the victim of friendly fraud. Some businesses may then try to implement simple fraud rules and basic fraud filters in an effort to prevent these transactions, but they just aren’t effective. Instead, businesses must implement a comprehensive fraud prevention solution that can protect them against the rising threat of friendly fraud.
How ClearSale Helps Businesses
At ClearSale, our hybrid solution includes multiple strategies to offer one of the most comprehensive fraud and chargeback prevention solutions on the market.
It starts with an AI-enabled algorithm that leverages trends, intelligence and data gathered from decades of fighting fraud in the most high-risk regions of the world. Using this technology, we can automatically approve most orders quickly.
Suspicious orders are flagged for contextual secondary reviews performed by our more than 1,500 fraud analysts who have the experience to recognize some of the hardest-to-spot fraud patterns. If necessary, our analysts may reach out to customers, but they do so in a way that demonstrates why consumers can trust your business to protect their information.
We then leverage the data gathered from those contextual reviews to help our system better distinguish valid transactions from fraud. That means our system can more easily recognize “good” transactions as we process more for the client, which increases their approval rates and revenue.
We also offer end-to-end chargeback management.
Comprehensive chargeback management
For every possibility, ClearSale has a range of chargeback solutions:
Total Chargeback Protection allows businesses to recoup a portion of losses due to fraudulent transactions.
Chargeback Guarantee reimburses the transaction amount plus the chargeback amount for any unauthorized transaction that’s approved.
End-to-End Chargeback Management delivers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.
To learn how you can prevent friendly fraud, contact one of our ecommerce experts.
