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Payments 101 - What is Friendly Fraud?

Friendly fraud is one of the most confusing terms for merchants, issuers and consumers – how can fraud be friendly? The truth is, it can’t. But before we get to that, let’s start with our ‘official’ definition…

“Friendly fraud” is a type of chargeback fraud that is committed when an individual had knowledge of and/or was complicit with – and/or somehow benefited from – a transaction on their account, even though they reported it as unauthorized.

What does this mean in simpler terms? Well, friendly fraud happens when a customer tries to gain money back from a legitimate transaction by filing a chargeback. As a result, the bank refunds the consumer, believing that actual fraud has occurred. 

Such behavior is a serious issue for merchants. Friendly fraud rates continue to grow, accounting for 90% of all fraud in industries like digital goods. With this in mind, solving the problem is vital. 

So, if you’re still unsure what friendly fraud means and how to solve it, don’t worry, we’re about to give you all the information you need to tackle the problem:

How does it happen?

When a friendly fraudster files a false credit card fraud claim, they must first convince the bank they should be receiving the money back. To do so, a friendly fraudster can cite a variety of problems but, more often than not, they will claim the transaction was unauthorized. 

With the zero-liability policies maintained by issuers, the “card not present” (CNP) nature of eCommerce, and Consumer Protection Regulations, issuers have traditionally been forced to take cardholders at their word. This means that they mark legitimate transactions as fraudulent – thereby initiating the time-consuming and costly chargeback process with CNP fraud.

What’s the difference between friendly fraud and normal fraud?

The main difference is the identity of the perpetrator. With ‘normal’ fraud, the fraudster uses a stolen identity, such as someone else’s credit card, for financial or personal gain. With ‘friendly fraud’, the fraudster is the cardholder, someone authorized to use the cardholder's account, such as a family member, or someone that isn’t an authorized user that has access to the card information. 

Is it always so unfriendly?

As we’ve seen so far, the term friendly fraud is a complete contradiction. In some cases, customers actively engage in fraud and false claims to maliciously game the system – often called “hostile friendly fraud”. 

However, most of the time customers involve themselves in it by accident. One instance of this so-called “benign friendly fraud” involves parents mistakenly requesting chargebacks for purchases their children made without their knowledge. (For more information on this, please refer to this article: The Many Faces of Friendly Fraud.)

Another example is when a customer accidentally mistakes a genuine purchase for a fraudulent one, requesting a chargeback because they don’t recognize a transaction or the supplied merchant details on a bank statement, or in some cases because they simply forgot about a purchase. 

Unfortunately, even innocent cases of false claims can soon turn foul. Companies lacking the time or money to dispute chargebacks give the customer the benefit of the doubt, potentially transforming the once-innocent cardholder into a repeat fraudster due to the ease of the process. Coding legitimate transactions as fraud in this way has serious downstream effects for merchants.  

Why is it so serious?

Whether purposeful or accidental, friendly fraud never results in a positive outcome. To put it into perspective, friendly fraud is the equivalent of physical shoplifting to the merchant – at least in terms of merchandise. Unfortunately, friendly fraud in the online world is much more problematic than a mere loss of goods.

Firstly, friendly fraud occurs weeks or months after the initial transaction, so it is much harder to track than if, like shoplifting, it was noticed at the time.

Furthermore, there are far more losses involved with friendly fraud. The merchant not only forfeits the price of the item, but they also lose money via shipping costs, transaction processing payments, as well as chargeback and representment fees along with potential increased declines from the issuer. 

So, what can be done to prevent it?

There is an array of measures merchants and issuers can take to prevent friendly fraud. Collaboration between merchants and issuers in real-time can help provide CNP fraud detection to deflect these types of claims by presenting detailed order information at the onset with the customer on the phone prior to the fraud claim being taken. 

Discover the various chargeback protection options at your disposal today by contacting Ethoca’s team of experts. You’ll be glad you did!

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