Just as there are various types of fraud, there are various subtypes of fraud, each with its own set of characteristics that often require countermeasures specific to that subtype. This applies to credit card fraud and its subtypes as well.

Generally, there are three main types of credit card fraud : friendly fraud, chargeback fraud, and true fraud. There is some overlap between the three, of course. For example, in some cases, chargeback fraud can be considered to be a type of friendly fraud, and in other cases, it can be considered to be a type of true fraud.

Friendly Fraud

The first type of credit card fraud is commonly referred to as “friendly fraud.” Generally speaking, friendly fraud is a situation in which a cardholder unintentionally commits fraud by disputing a purchase despite having actually authorized the purchase.

Common causes of this are that the cardholder has forgotten that he made the purchase or does not recognize it on the statement, the cardholder has forgotten about a recurring automatic payment that has a long cycle (e.g., annual memberships), or a member of the cardholder’s family made the purchase without the cardholder’s knowledge.

The cardholder mistakenly believes that he has been charged for a purchase he did not approve. The fact that this was done unintentionally, without malicious intent, is behind the designation of this type of fraud as “friendly” fraud.

Preventing Friendly Fraud

Although friendly fraud is typically the result of an honest mistake, you still need to protect your business from the costs and other problems it can create. The following measures are a good place to begin.

Clear identification of the merchant on the credit card statement

In most cases, not recognizing a purchase listed on the billing statement is more likely to be due to an unclear description or identification of the merchant than to forgetting the purchase altogether. The merchant or credit card company may understand the jumble of letters and numbers, but it’s of no real help to most cardholders. Be sure that the descriptor used on statements is easy to interpret.

Prompt resolution of questions and disputes

Prompt and professional customer service can go a long way toward resolving issues that could otherwise turn into friendly fraud. If the customer feels good about the interaction with customer service, he or she will be more likely to accept the possibility that he or she has made a mistake. That usually means that the customer will be more cooperative in the investigation of the matter, allowing you to resolve it more quickly and to leave the customer with a positive impression.

Frequent—but not too frequent—contact

Establishing thorough records of transactions is extremely important for your internal operation, but creating a good paper trail can also help customers remember their purchases.

This can be as simple as e-mailing an order confirmation, a shipping notification, and a follow-up message after the customer has received the items. In the case of recurring bills, a regular reminder can be sent. It may also be appropriate to send other information at times.

Use caution and restraint when doing so. Many businesses tend to let their enthusiasm (or inaccurate understanding of good marketing) drive them to send far too many e-mails to customers and potential customers. Spamming your customers is simply a good way to lose those customers.

The balance can be difficult to achieve, but it is important. Ask your customers for feedback and make sure that they have easy, hassle-free control over the amount of e-mail you send them.

"Friendly" Chargeback Fraud

Chargeback fraud is kind of like a less friendly version of friendly fraud. While the “fraud” in friendly fraud is unintentional, chargeback fraud involves a cardholder knowingly and deliberately disputing a charge and demanding a refund despite knowing that he or she did in fact approve the purchase and actually received the relevant goods and/or services.

There are a variety of reasons that people commit chargeback fraud, the most common of which are “buyer’s remorse,” missing the deadline for returns, and simply wanting to avoid paying the bill. What began as an innocent mistake becomes an outright crime from the point at which a cardholder realizes his mistake but continues demanding a refund.

Preventing Friendly Chargeback Fraud

Because chargeback fraud and friendly fraud have a similar pattern, with the former being intentional while the latter is generally unintentional, the things that you can do to prevent them are also the same in many ways. The intentional nature of chargeback fraud does, however, mean that particular attention should be given to certain things. In addition to the measures indicated above for friendly fraud, you should consider implementing the following.

Skilled and reliable customer service

If your customer service staff is skilled and experienced, they will more often than not be able to tell when something isn’t quite right with a dispute. Politely and professionally questioning the customer about the problematic details alone could discourage the person from continuing with the scam.

At the very least, a customer service team that can be politely skeptical when necessary could give you the ability to start investigating as early as possible. The time and effort spent training the team well are likely to provide a variety of benefits, including saving you money and preventing bothersome legal action.

Effective and reasonable return policy

Sometimes cardholders don’t understand the deadline for returns or simply forget about it, but still attempt to get a refund by initiating a chargeback. This differs from asking for an exception to be made. Chargeback fraud involves a deliberate attempt to deceive the merchant, etc., while asking for an exception is typically an honest attempt to receive leniency.

Having a clear, easy-to-understand return/refund policy will help you in two ways. First, honest customers will be less likely to forget about a return deadline. Second, it makes it harder for dishonest customers to get around the policy.

Be sure to include enough flexibility that legitimate extenuating circumstances can be taken into consideration. That willingness to listen to the customer and go a little above and beyond to help her often results in a higher degree of customer loyalty and more word-of-mouth advertising for your business.

Clear and attentive communication

Consistent and clear communication that isn’t so frequent that it becomes annoying will do much to deter chargeback fraud, friendly or otherwise. The frequent contact itself often discourages scammers from continuing their attempts, but it also gives you more leverage against specious disputes.

This contact can be as simple as sending an order confirmation, a shipping notification, and a follow-up message after the customer has received the items. E-mail communication can include easily seen links to your return/refund policy. Regular reminders for recurring payments and reasonably hassle-free ways to cancel orders can also be helpful.

Delivery and tracking confirmation

One of the most common approaches taken by scammers attempting to defraud a merchant is simply to claim that the product was never received. This is where delivery tracking and confirmation can make a huge difference. The technology for tracking and confirmation continues to evolve, and its accuracy is improving.

It may not be possible to get a signature in every case, but many delivery companies now photograph the package at the delivery point, often using an angle from which the location can be identified (e.g., showing the front door of the house). If you have solid evidence that the product was delivered correctly, chances are that the fraudster will back off.

In Closing

Although it may be “friendly” in the sense of being unintentional in many cases, all types of credit card fraud cause businesses and consumers millions of dollars each year. The prevalence of such fraud in some industries can even earn your business the label “high-risk business” before you even make your first sale.

Your high-risk payment processor will have the tools and expertise to help you prevent fraud in many cases and at least minimize the risk and damage in other cases.