Fighting Friendly Fraud Without Sacrificing Customer Experience
Friendly fraud can be an online retailer’s worst enemy. While fraud detection tools are increasingly adept at spotting fraud attempts by organized criminals, fraud committed by otherwise good individual customers can be hard to detect–and it’s getting more common. Friendly fraud moved past card testing and identity theft to become the second-most common fraud attack type in 2023, according to Merchant Resource Council survey data.
Friendly fraud is expensive. In addition to losing the goods and wasting shipping spend, retailers must also pay chargeback fees. They must also choose between paying the costs associated with disputing chargebacks or risking higher processing costs as their chargeback ratio rises. Worldwide, chargebacks are forecast to cost retailers more than $117 billion this year.
Retailers have a strong financial motivation to fight friendly fraud but also have a compelling need to keep customers happy. The percentage of customers who say their experience with a brand matters as much as what the brand sells climbed from 80% in 2020 to 88% in 2022.
So retailers that add friction to checkout and returns in an effort to curb friendly fraud may find themselves losing other customers who want a more seamless experience. Rather than making your customers jump through hoops when they place orders or making returns more difficult, consider these best practices for fighting friendly fraud without wrecking your CX.
Cover the fraud-fighting and CX basics
Make sure your fraud prevention foundation is solid. Require customers to enter their CVV code when paying by card. This makes it harder for customers to claim that a family member or someone else with access to their computer placed the order using a stored card without their knowledge. Understand that it’s not just card payments that can lead to chargebacks. Alternative payment methods like digital wallets and BNPL can also yield chargebacks if consumers seek a way to resolve their budget problems.
Make finding and understanding your store’s return, exchange, and refund policies easy. The return process should be relatively simple, too. Consumers are more likely to file a chargeback if they can’t find, understand, or easily follow a retailer’s return process. For the same reason, make customer service easy to access. Good customer service can also help with customer retention: Of the 71% of consumers who switched brands in 2022, 48% did so for better customer service.
Implement or update order tracking and delivery confirmation tools that cover orders from approval to the customer’s doorstep. These tools improve the post-purchase experience for your best customers and provide evidence to dispute fraudulent non-delivery claims.
Screen for behaviors that can indicate friendly fraud
A customer who makes an expensive purchase that’s unusual for them, makes multiple orders within a short amount of time, or places a large order as a first-time visitor could be planning a chargeback. These behaviors should factor into each order’s fraud risk score. So should the customer’s history of chargebacks or returns, if it’s known. That’s because 40% of consumers who file a chargeback will file another within two months.
These behaviors can also indicate organized fraud, so even businesses that don’t have an issue with friendly fraud yet should screen for them. Orders that score high for potential fraud should have a secondary review to avoid false positives because 41% of customers will boycott a store after a false decline, according to the most recent ClearSale international consumer attitudes survey data.
Collect and deploy compelling evidence
Visa updated its compelling evidence requirements (CE 3.0) in April to help retailers fight against friendly fraud. Retailers should get to know the new rules because under the new requirements, Visa will automatically deny customer chargebacks that follow two good transactions with the same business and have the same key order data.
Retailers can submit that data after a chargeback is filed, but they can also submit it before – effectively precluding a chargeback. The new rules don’t apply to brand-new customers because there’s no order history to reference, but if an established customer decides to try a fraudulent chargeback, compelling evidence can shut it down.
Bring in reinforcements
Retailers who don’t have the resources to manage fraud prevention or chargeback disputes in-house can partner with providers to deliver those services. When looking for a fraud prevention solution, ask lots of questions.
Does the company have experience with retailers in your vertical and geography and with similar customer personas? Is everything automated, or do they provide expert reviews to reduce false positives and maintain CX while preventing fraud? What chargeback guarantees or insurance do they offer? And what do current or past customers say about working with them?
Covering the fraud and CX basics, watching for fraud indicators during the order process, leveraging Visa’s new chargeback rules, and choosing the right partners can help your business deliver a smooth experience for trustworthy customers without giving away the store to friendly fraudsters.