fbpx

Speak with an expert: 1 (801) 405-9888

WHAT IS CHARGEBACK FRAUD?

What is Chargeback Fraud?

TABLE OF CONTENTS

What Is Chargeback Fraud?

Increasing numbers of consumers are choosing to shop online. In the second quarter of 2021, total e-commerce retail sales increased about 28% from the previous year’s second quarter. Alongside the rise of e-commerce in recent years, friendly fraud and chargeback incidents have grown. Unfortunately, most merchants don’t know how to protect themselves from these incidents. 

 

While almost all merchants consider friendly fraud a threat to their business, most are unsuccessful in taking measures to fight chargeback fraud disputes. With the pandemic also exacerbating chargeback rates because of increased online shopping, it’s more important than ever to know how to prevent friendly fraud. Keep reading to learn more about friendly fraud and how you can limit its repercussions for your business.

Four types of friendly fraud

What Is Friendly Fraud?

Although friendly fraud sounds innocent enough, there’s nothing friendly about this frequently malicious practice. This type of fraud is different from traditional fraud, as an authorized cardholder commits fraudulent activity rather than an unauthorized stranger. As a result, the fraudulent activity is challenging to catch.

 

Sometimes, the fraud is accidental when the customer accidentally mistakes a legitimate transaction for a fraudulent charge. However, other times, customers intentionally commit friendly fraud with malicious intent. In this case, customers often make fraudulent chargeback requests after they’ve reaped the benefits of a product or service, committing a type of e-commerce shoplifting. 

 

Because an authorized cardholder makes the fraudulent transaction, friendly fraud is often difficult to identify. However, friendly fraud leads to increased chargeback rates, which are detrimental to your business, so you should learn how to spot them. There are four common types of friendly fraud:

  1. Malice: When customers intentionally make a purchase with the plan to falsely dispute a charge, they’re committing friendly fraud maliciously. When disputing charges, these individuals lie to the bank, often saying a purchase was unauthorized or the merchant has made an error. These customers are essentially shoplifting from your business — just online. 
  2. Customer error: Accidental friendly fault happens when a customer accidentally claims a transaction is fraudulent. For instance, they might forget they made a purchase, fail to recognize a merchant on their account statement or notice a recurring charge they didn’t think they agreed to. While unintentional, customer error is still harmful to merchants. 
  3. Bad customer experience: If customers feel like businesses don’t deliver on their promises or they didn’t get what they paid for, they might request a chargeback from the bank without contacting the merchant. This frequently happens when a customer wants a refund, even if the reasons are illegitimate. It frequently occurs in industries like nutraceuticals or if your customer service team needs improvement.  
  4. Family fraud: This type of friendly fraud happens when a family member, such as a child, makes a credit card transaction without the primary cardholder’s knowledge. The ability to store credit card information across sites has increased the prevalence of family fraud, as parents often store their information on frequently used sites like Amazon.

How Does Friendly Fraud Happen?

Those who commit friendly fraud do so in a variety of ways. Regardless of whether friendly fraud was committed accidentally or with the intent to steal from your business, fraudulent charges are always harmful. Common excuses consumers use when committing friendly fraud include: 

  • The item or service was never delivered. 
  • The item or service was different than described, such as being counterfeit, the wrong color or poor quality.
  • The merchant continued a recurring payment after the customer asked to cancel it.
  • The cardholder never authorized the original transaction.

 

The traditional mindset that “the customer is always right” also contributes to an increase in chargeback fraud. Many credit card companies follow a customer-first policy and request that the banks they work with also follow their regulations. However, many customers are aware of this mindset and take advantage of customer-first guidelines.

 

Because card companies want to issue as many cards as possible and customers have certain rights to dispute transactions, credit card companies frequently prioritize the rights of the customers over merchant rights. As a consequence, customers get away with fraud, harming your business.

 

The increase in e-commerce has also contributed to a rise in friendly fraud, as chargeback policies and laws haven’t evolved with current consumer practices. The Truth in Lending Act of 1968 is the basis for today’s chargebacks and ensures that cardholders aren’t held responsible for unauthorized charges. A chargeback happens when a customer gets money returned to their account after disputing a credit or debit card claim.

 

While chargebacks are necessary for illegitimate charges, many customers take advantage of chargebacks in the age of e-commerce. These were created before e-commerce allowed customers to store credit card information in apps and websites, and the merchant was always present to see the transaction. 

With e-commerce, there’s a level of trust between merchant and buyer that some customers violate, so you’ll need to know how to prevent friendly fraud until chargeback policies evolve for the era of online shopping. 

When committing friendly fraud, customers might be able to repeatedly take advantage of your business if you don't know how to prevent chargeback fraud.

Why Is Friendly Fraud Serious?

Ultimately, friendly fraud will never result in a positive outcome for the merchant. 

 

First of all, the customer will probably go straight to the bank rather than contacting the merchant, not understanding they’re putting the bank in the problematic condition of needing to create a chargeback. This process is burdensome and inconvenient for the banks, which often have to follow the mindset that the customer is always right. Unfortunately, customers take advantage of the fact that banks and credit card companies don’t want to lose their business, often at the detriment of the merchant.

 

If you don’t know how to protect yourself from friendly fraud, you’ll experience an elevated level of chargebacks from fraudulent transactions. Increased chargeback rates can put your business in the high-risk category, which could make it difficult for you to get a necessary merchant account. A merchant account allows you to accept credit and debit card payments. However, many banks and payment gateway processors won’t do business with you if it’s classified as high-risk.

 

Though friendly fraud is equivalent to shoplifting in the world of e-commerce, it’s more challenging to catch than physical shoplifting, as it can occur weeks or even months after the original transition was made. When committing friendly fraud, customers might be able to repeatedly take advantage of your business if you don’t know how to prevent chargeback fraud. 

 

Furthermore, the nature of e-commerce adds to the losses your business can suffer after a friendly fraud incident. As the merchant, you’re forfeiting the price of the item with fraudulent chargebacks. However, you’ll also lose money because of shipping charges, payment processing and potential chargeback fees. As a result, friendly fraud can cost your business more than you might initially think. 

What Are the Best Practices to Avoid Chargebacks?

What Are the Best Practices to Avoid Chargebacks?

When someone commits chargeback fraud, they’re likely to take advantage of your business multiple times if you don’t identify the incident immediately. Studies demonstrate that 83% of convicted criminals will commit another crime — and consumers rarely get caught committing fraud, as friendly fraud chargebacks originate from authorized purchases. Because these transactions don’t have the same characteristics as traditional identity theft cases, fraud protection software also often struggles to catch friendly fraud.

 

However, there are actions that you, the merchant, can take to prevent friendly fraud. Although customers have rights when it comes to chargebacks, you also have rights to challenge fraudulent transactions. Always take prompt action if you think a customer is committing friendly fraud. Additionally, be sure to document all transactions and interactions with customers, investigate suspicious customer orders, practice good customer service and deliver on what you promised.

Document Transactions and Interactions

Sufficient documentation and evidence are necessary to protect yourself against chargeback fraud. Save all delivery documentation, having the customer sign for a package once it arrives at its destination. By requesting that the customer sign for a package, the merchant is proving they delivered the package to the appropriate customer. This proof can help prevent customer claims that the package was lost or stolen.

 

If you lose a dispute for an obviously fraudulent claim, you should keep the customer’s information to prevent future transactions. This customer could be a repeat offender who has won chargeback cases against other merchants. A list of customers you’ve denied will help you keep track of which customers are repeat chargeback offenders so you don’t accept an order from that customer in the future.

Investigate Strange Customer Orders

Keep an eye out for orders that are larger than usual or if a specific customer has been placing a lot of orders. Also, note whether the customer is purchasing an item that’s commonly stolen. If you think they might be committing a fraudulent transaction, call or email the customer to confirm that their intent isn’t malicious or the transaction isn’t an accident. Document this phone call for evidence in case of a future chargeback claim. 

 

Proper data documentation and management can also help you prevent friendly fraud. Analyze the data associated with each chargeback to learn the most common reasons why customers are requesting chargebacks. That way, you can mitigate chargeback issues from the source.

Practice Good Customer Service

A strong customer service team that quickly provides solutions will ensure a better customer experience, in turn lowering your chargeback rates. Diligently pay attention to a customer’s item during delivery. Additionally, send confirmation emails stating what products or services the customer ordered, how much you charged them, when the customer can expect their delivery and your return policy. Send a follow-up email if anything changes in the delivery process.

 

Great customer service will also build your relationship with your customers. Increase customers’ trust in your business by having a clear intent and policy — a customer is less likely to commit friendly fraud if they can trust your business. Make sure your customers can easily identify your business on their financial statements. Otherwise, they might not recognize a purchase and request a chargeback. 

Keep Your Promises

Try to honestly advertise to consumers and ensure you keep your promises. Building a trusting relationship is crucial to encourage customers to turn to you, the merchant, instead of the bank. Delivering on promises you make to customers will build trust in your business and make them less likely to request chargebacks. The goal should be to keep the customer satisfied so they’re less likely to request a refund.

How Can a High-Risk Merchant Account Service Help?

If you’re in an industry that’s likely to experience a lot of chargebacks, banks will likely label your business as high-risk. Many banks and payment processing companies don’t want to risk working with a high-risk merchant. Also, once you’ve reached a certain threshold of chargebacks, you’re more likely to have your funds frozen or account terminated.

 

Common high-risk industries that experience higher chargeback rates include: 

  • Credit repair: Credit repair companies are high-risk, as they often experience a high level of chargebacks due to their clientele. Those with bad credit might have trouble paying for your services, so they dispute claims more frequently. 
  • Coaching: Coaching professionals might experience a higher chargeback rate than other companies due to frequent 30-day refund trial periods. This makes it easier for people to request chargebacks, so banks are less likely to want to work with your business. 
  • High volume: Merchant accounts that experience a high volume of transactions have higher chargeback and fraud rates simply due to experiencing more transactions.
  • Multilevel marketing: The multilevel marketing industry often has slow refund requests, which leads to excessive chargebacks. 
  • Nutraceuticals: The nutraceutical industry experiences higher chargeback rates because of inaccurate product descriptions. If products aren’t what customers expected, they request refunds.
  • Subscription continuity: Many subscription-based services have higher chargeback rates, as customers often sign up for free trials and forget to cancel their subscriptions.
  • Travel: Many travel companies experience higher chargeback rates due to last-minute cancellations and subsequent refund requests.

 

As a high-risk business, you’re more vulnerable to chargeback fraud. Fortunately, high-risk merchant account services can help your business safely and efficiently accept credit card payments. These services often offer retail POS systems to decrease your chargeback rate and cut back on fraud. A good POS system can also help you better manage your customers to keep track of potentially fraudulent transactions. 

Find Your Zen From Friendly Fraud With Zen Payments

If your business suffers from frequent chargeback fraud, it might be labeled as high-risk. As a high-risk business, you’ll want to protect yourself from friendly fraud by working with a high-risk merchant account service. Zen Payments has more than 15 banking partners to ensure your business can safely accept credit card payments. Additionally, we’ll keep your account open for the life of your business.

 

While banks might not treat your business as a quality partner, Zen Payments believes in no good merchant left behind and will work with you for your high-risk payment processing solutions. Contact Zen Payments to get a quote within 24 hours!

Linked Sources:

RETAIL

NUTRACEUTICALS

HIGH-RISK

CREDIT REPAIR

COACHING

HIGH VOLUME

MLM

NUTRACEUTICALS

SUBSCRIPTION COMMUNITY

TRAVEL

HIGH-RISK

CONTACT US

https://bjs.ojp.gov/library/publications/2018-update-prisoner-recidivism-9-year-follow-period-2005-2014

https://www.ftc.gov/enforcement/statutes/truth-lending-act

https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf