What is Friendly Fraud and How To Prevent It?

Friendly fraud happens when customers make purchases and then dispute them, claiming they never authorised or received them. As your business embraces digital payments, you face growing risks from these chargebacks. This deceptive practice costs merchants billions annually. In this article, we will understand friendly fraud and ways to prevent this fraud.

What is Friendly Fraud?

Friendly fraud occurs when you or your customers dispute legitimate charges with banks, often unknowingly. You might forget making a purchase and not recognise the merchant name on your statement, leading to unnecessary disputes. Misunderstandings about return policies, subscription terms, or delivery timeframes can trigger chargebacks when expectations aren’t met.

Sometimes, family members make purchases without permission, causing you to report transactions as unauthorised. For merchants, these disputes look like fraud but come from actual customers. This makes it challenging to prevent and manage such incidents.

Why Is Friendly Fraud on the Rise?

Multiple overlapping trends have driven the growth of friendly fraud. The rapid expansion of ecommerce and the rise in digital transactions—combined with the shift from cash to card payments—have made it easier for consumers to get confused about purchases. Often, card statements don’t clearly show the merchant’s name, which can make a legitimate charge look suspicious to the cardholder.

On top of that, more connected devices now store payment card details—like smart speakers, streaming platforms, and mobile apps—making it easier for someone other than the actual cardholder to use the stored card to make a purchase.

Adding to this, many card issuers offer zero-liability policies, meaning the cardholder isn’t held responsible for unauthorised transactions. So, when a customer disputes a charge, issuers often approve the chargeback unless they can clearly prove that the cardholder—or someone in their household—authorised it.

Impact of Friendly Fraud on Businesses

1. Financial Losses:

When your business faces friendly fraud in the digital marketplace, you suffer double financial damage – both the merchandise and the payment are gone. You’re also hit with chargeback fees ranging from ₹1,500-7,500 per dispute.

2. Reputational Damage:

Your reputation takes a hit when disputed transactions lead to negative reviews online. In a competitive e-commerce environment, these reviews make potential customers think twice before buying from you.

3. Chargeback Penalties:

Payment processors track your chargeback ratio, and if it exceeds their threshold (typically 0.9%), you’ll face higher payment processing fees or even account termination. This threatens your ability to process payments in a growing digital economy.

4. Resource Drain:

Fighting disputes demands considerable time as you gather evidence, communicate with banks, and manage paperwork. These are resources better spent growing your business.

5. Increased Fraud Prevention Costs:

You’ll need to invest in friendly fraud preventive measures like transaction fraud detection software and employee training specifically adapted to Indian transaction patterns to protect your bottom line.

Different Types of Friendly Fraud

1. Chargeback Fraud:

This happens when your customer buys something from you and then contacts their bank to dispute the charge instead of working with you directly. They might claim they never received the item, even when they did, or say they didn’t authorise the purchase.

2. Refund Abuse:

Here, your customer receives the product but still demands their money back while keeping what they bought. They might wear clothes once before returning them or use digital products before claiming dissatisfaction. Some customers exploit your return policies by purchasing items with the intention of using them temporarily. Such behavior creates inventory problems and increases your operational costs.

3. Accidental Friendly Fraud:

Not all cases are intentional. Sometimes your customers simply forget to make purchases or don’t recognise your business name on their statement. They might be confused by recurring subscription charges or family members’ purchases on shared accounts. These misunderstandings result in friendly fraud chargebacks.

Strategies to Prevent Friendly Fraud

1. Strong Communication:

Your business can reduce friendly fraud by clearly explaining your policies. Make sure your customers easily understand your return policies, shipping timeframes, and billing practices. When you provide detailed product descriptions with accurate images, customers know exactly what they’re buying. It reduces disappointment-driven disputes.

2. Clear Billing Descriptions:

When your customers see your company name clearly on their bank statements, they’re less likely to dispute charges. Use recognisable billing descriptors that match your business name rather than a parent company or payment processor name that customers won’t recognise.

3. Authentication Methods:

Protect your business by verifying who’s making purchases. Implement OTP verification, require CVV codes, and use two-factor authentication for transactions. These simple steps verify that your customers are who they claim to be.

4. Order Confirmation:

Always send detailed receipts showing what was purchased, when it will arrive, and how much was charged. Include your contact information so customers can reach you with questions before filing disputes with their banks.

5. Customer Service:

Make it easy for your customers to contact you through multiple channels. Respond quickly to complaints and inquiries, as excellent service often prevents customers from filing chargebacks out of frustration.

7. Fraud Detection Tools:

Invest in technology that spots suspicious patterns. Modern tools can flag potentially fraudulent transactions before they become chargebacks, saving you money and hassle in India’s growing digital marketplace.

Strategies for Addressing Friendly Fraud

1. Investigation:

When facing a dispute, move quickly to review what happened. Look at your transaction records to understand the full picture. Check if the customer contacted you before filing the dispute with their bank. Your prompt investigation helps determine if this is a genuine mistake or potential fraud.

2. Providing Evidence:

Fight chargebacks by gathering strong proof. When you collect delivery confirmations, IP addresses, device information, and communication logs, you build a solid case. Your evidence should tell a clear story about the legitimate purchase to convince the bank that this was a valid transaction.

3. Customer Contact:

Reach out directly to customers who file disputes. Many times, a simple conversation resolves misunderstandings. You might discover they forgot to make the purchase or didn’t recognise your company name on their statement. Offering to help before they contact their bank often prevents formal disputes.

4. Chargeback Representment:

Don’t accept all chargebacks without question. Submit your evidence through the representation process to contest false claims. Your detailed documentation can help recover lost revenue and discourage repeat offenders from targeting your business again.

5. Improving Prevention:

Learn from each case to strengthen your systems. Update your policies based on patterns you notice, implement better verification steps, and make your billing descriptions clearer. Your ongoing improvements will gradually reduce e-commerce fraud incidents.

Frequently Asked Questions (FAQs):

1. What are some common examples of friendly fraud in e-commerce transactions?

Customers might receive products but claim they never arrived, seeking refunds while keeping the items. Some people wear clothing once before returning it as “defective.” Parents often dispute charges when their children make unauthorised purchases using their payment information. These situations leave merchants facing both product and payment losses.

2. How does friendly fraud impact merchants and their businesses?

Friendly fraud creates a double loss where merchants forfeit both revenue and merchandise while paying hefty chargeback fees. Your business reputation suffers when disputed transactions generate negative reviews. You’ll waste valuable time gathering evidence and communicating with banks.

3. What are the main challenges in detecting and preventing friendly fraud?

Friendly fraud is difficult to spot because it comes from actual customers, not obvious criminals. Your customers appear legitimate because they are your real customers. The chargeback process typically favors consumers, making it challenging for you to win disputes without substantial documentation tracking the entire customer journey.

4. What is the difference between friendly fraud and hostile fraud?