According to the 2022 Chargeback Field Report, friendly fraud remains a major concern for 65% of merchants polled. Considering that the merchants involved in the survey accounted for nearly every vertical, this is a hefty statistic that bodes ill for eCommerce at large. So, what’s happening here?
Why is friendly fraud still a big problem after nearly a decade of heightened awareness, merchant and network engagement, and elevated regulatory oversight?
Well, a lot has changed over the years. So, let’s reexamine friendly fraud as a concept and see what we can learn now.
What is Friendly Fraud?
Essentially, the term “friendly fraud” describes the process of a consumer engaging in first-party fraud, whether accidentally or intentionally. When a customer responds to an unsatisfactory purchase by skipping over the merchant to receive a refund directly from their bank, that customer is guilty of friendly fraud.
The trouble with friendly fraud is that it constitutes a particular gray area that banks are hesitant to investigate. Banks tend to err on the side of their customers in a dispute, even if their customers fail to understand the rules or just generally disregard them.
These situations arise from commonly misconstrued return policies, merchant error, or malicious intent.
How Does Friendly Fraud Happen?
There are two significant categories of friendly fraud: accidental and intentional. In the former category, the customer either didn’t understand the proper return process or policy, forgot about a scheduled payment, or misread a merchant’s billing details on their statement.
In the latter category, the cardholder generally tries to get something for free. These break down like this:
Accidental Friendly Fraud
- Customer didn’t understand store policies
- Customer forgot about a scheduled payment (subscription services are rife with this issue)
- Customer didn’t recognize merchant’s billing credentials
- Customer misunderstood the return policy
Intentional Friendly Fraud
- Customer didn’t want to pay for the item purchased
- Customer waited too long to return the item to the store
- Customer didn’t like the item they agreed to purchase
- Customer’s family member or other household member bought the item without the customer’s permission
Regardless of the reason friendly fraud was committed, its effects can be devastating for merchants. In fact, merchants are held liable for all incidents of credit and debit card fraud, even if the issue was a direct result of friendly fraud.
Friendly Fraud is the Bane of Merchants
Why is friendly fraud such a sticky issue? Well, again, it’s difficult to prove. Banks would rather shift liability for the dispute onto merchants in the supposition that the merchant is responsible for the dispute, even when they aren’t.
The reason for this is obvious; banks lose nothing when they’re wrong. Since merchants now bear all the financial liability for disputed transactions, the banks will simply reimburse themselves at the merchant’s expense. While this certainly doesn’t seem fair, merchants do have one recourse against friendly fraud, though it too is an imperfect and costly endeavor.
Merchants can recoup their lost revenue from a disputed transaction (minus chargeback fees) through representment. During this process, merchants can literally “re-present” the transaction to the bank to verify the transaction’s validity. However, the process is quite costly, can drag on for months, and still bears an uncertain outcome for merchants.
In this way, friendly fraud becomes a one-sided affair in which merchants are stuck holding the bill for customers who aren’t held to a similar standard.
How are Banks and Networks Fighting Back?
While imperfectly, banks and card networks have attempted to address merchant concerns about friendly fraud in recent years. As is often the case, the larger networks tend to set the benchmarks for the
Between Visa RDR and Compelling Evidence 3.0, MC Mastercom Collaboration, and American Express Merchant Inquiry, merchants are now empowered to avoid several false disputes and chargebacks stemming from unauthorized reason codes. Each platform attempts to flag suspicious transactions before they are finalized and also provides merchants with advance notice of incoming disputes before they become chargebacks.
While this is great news for merchants everywhere, it is merely a drop in the bucket when it comes to friendly fraud. These first-party fraud disputes now account for six out of every ten incoming chargebacks.
Friendly Fraud Also Affects Consumers
I think it’s very important to stress this here: merchants aren’t the only ones who suffer from the uptick in friendly fraud. Consumers, too, can certainly feel the pinch.
Given recent supply chain shortages and skyrocketing inflation, consumers need to understand the full scope of their actions regarding online purchases. Sure, it seems more convenient to skip a merchant with a strict return policy in favor of receiving a refund directly through your bank… but it isn’t. Not anymore.
Due to recent updates (above) most banks and card networks now require cardholders to prove they attempted to contact the merchant before filing a dispute. Often, they must also include the merchant’s return policy and evidence that the item purchased failed to meet expectations. This evidence is usually in the form of photographs or video, and without it, many cardholder disputes will be rejected before they are filed.
If a cardholder wants to file a dispute with their bank, they must be able to prove the item in question:
- Is visibly damaged or defective in some way
- Was never received (shipping and tracking issue must be attached)
- Is significantly different from what was ordered
- Is not the right item, or the wrong amount
Now, thanks to these new regulations, customers can also be held accountable for falsely filed disputes. If a customer can’t prove any of the above, they may be held responsible for the original transaction amount and any fees the merchant might have incurred in the dispute. If the customer is a frequent offender, they may lose their account privileges altogether.
Multi-Tiered Strategies Work Best
Don’t get me wrong; there has been significant progress in the dispute management sector due in no small part to the efforts of fintech professionals in response to merchant outcry. However, there is still quite a lot of work left to be done.
Until we have a more cooperative and unified framework for managing and preventing fraud, including first-party fraud, I advise all merchants to take a long, hard look at their internal processes to identify and mitigate trigger points that cost you money. To do so, a multi-tiered anti-fraud strategy is always best.
Suppose your business is on the receiving end of a plethora of chargebacks and disputes each month. In that case, it behooves you to adjust your internal best practices and seek expert perspectives and services, where applicable.
