By Suresh Dakshina, Co-founder, Chargeback Gurus
This February, US credit card debt hit an astonishing all-time high – $986 billion. This is just three years after stimulus checks and broader pay raises had allowed Americans to save more than ever—the personal savings rate of April 2020 was the highest on record. Inflation has spent many months battering individuals’ wallets and their ability to put aside money, and many have started leaning on credit cards more and more to make ends meet. That pace isn’t slowing down, either: January saw credit card debt jump over 11%.
Interest rates have also been on the rise, coupled with increased usage, making it hard for individuals to get out from under the debt piling up on their cards. As anyone who’s struggled with high-interest debt can tell you, this can be a stress-inducing experience, and many start exploring means of debt relief – some may consolidate debt, start a side hustle, even enter bankruptcy or sell off assets. But unfortunately, some turn to “friendly fraud” – disputing legitimate purchases on their credit card with chargebacks – to create a little breathing room in their finances.
What is friendly fraud?
Despite the name, there’s nothing particularly friendly about this type of fraud—it’s still a crime and a serious problem for those performing it and the merchants whose valid sales are disputed. The term “friendly” simply signifies that the fraud is perpetrated by an actual, known customer, not a fraudster pretending to be someone else to avoid detection. Though the industry soon realized that Friend Fraud is not the proper term to describe the malicious intent of a few customers, the new term used now is First Party Misuse.
Chargebacks are intended to protect customers from fraudulent purchases made in their name, but friendly fraud is an abuse of that protection. It happens when a consumer intentionally requests a refund on a purchase made on their card that they’re not entitled to receive.
Perhaps they were unhappy with the product’s performance, or they set out to get the item for free by charging the purchase and then filing a dispute later—effectively shoplifting, but with added steps (and, for the merchant, added fees). In some cases, friendly fraud happens accidentally when a customer doesn’t understand the proper methods for requesting a refund or they don’t recognize a charge they made on their statement and request a refund.
Regardless of the intention, any of the above actions constitutes friendly fraud—which can make up three-quarters of all chargebacks. These are headaches for merchants, appearing legitimate at first glance and requiring a closer look to determine the chargeback’s validity.
How can merchants prevent it?
Friendly fraud is unusually hard to detect since it generally stems from a valid purchase and isn’t often accompanied by the usual red flags that pop up for other types of card fraud. It’s also challenging to predict since a customer might do it sparingly or once off during difficult economic times.
There are several strategies merchants can use to fight back against or proactively prevent friendly fraud from hitting their bottom line:
- Use clear billing descriptors. Many friendly fraud cases happen unintentionally when a customer doesn’t recognize the charge on their statement, such as when a merchant’s legal business name shows up rather than the doing-business-as (DBA) name by which the customer knows that organization. Make sure descriptors are recognizable at a glance, perhaps by including a URL or phone number.
- Keep detailed, accurate transaction records and document all communication with customers. These will put merchants in a good position to have the proper evidence on hand when they go through the chargeback representment— when the charge is submitted a second time, along with evidence that refutes the cardholder claims. Sometimes, customers will misunderstand or forget something like a future charge or recurring billing, so proving there was communication about the charge sent to the customer in advance will go a long way toward winning disputes.
- Identify the true reasons behind chargebacks. Every chargeback comes with a reason code explaining why the charge is reversed; this is the first step in evaluating which chargebacks are legitimate and which aren’t. Every time one happens, merchants should investigate; the reason code provided is the starting point, and if it tracks with the evidence, you find it’s likely legitimate. But a reason code that doesn’t match what’s happening, in reality, is a common signal that something is awry and friendly fraud might be occurring.
- Respond to chargebacks promptly, with the proper evidence. Each chargeback reason code should also specify the exact proof merchants need to supply to refute a chargeback claim effectively. That’s a great place to start an investigation and provides a blueprint for disputing a chargeback in representment if the merchant determines it to be fraudulent. Merchants shouldn’t delay disputing friendly fraud, either; they typically have 7-30 days to react depending on the payment processor and waiting too long to represent the dispute might result in forfeiting the ability to recover that lost revenue.
- Identify and block repeat offenders. Just like on social media, the block button is your friend. Don’t hesitate to block those users trying to abuse the chargeback process, especially if it’s clear they’re doing so intentionally and repeatedly. Many won’t think twice about targeting a merchant over and over if they think they’ll have success at least a portion of the time.
Friendly fraud can be costly for merchants. In addition to revenue lost to these reversed transactions, additional transaction fees can add up, as can the time and effort spent disputing the chargeback. An incremental uptick in the merchant’s chargeback ratio is also far from ideal.
Fraud and dispute rates go up in times like these, with soaring inflation, interest rates increasing, and overall card balances at an all-time high. Merchants should take this moment to ensure their methods for preventing and fighting back against friendly fraud are strong and that they’re doing all they can to limit the financial damage of this fraudulent activity.
About the Author
Suresh Dakshina is a Co-founder of Chargeback Gurus. A pioneer in data analytics and industry-specific risk management, he is a certified e-commerce fraud prevention specialist and Certified Payments Professional. Suresh holds a Master’s degree from the University of Southern California and has consulted Fortune 5000 companies for over a decade on chargeback and fraud minimization. He is a veteran speaker and works closely with Card Networks like Visa and American Express on chargeback process optimization and compelling evidence policies.
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