Friendly Fraud Is Not Your Friend

by Raymond Pucci 0

The growth of E-commerce shopping has also driven online fraud attempts, usually in the form of card-not-present (CNP) transactions. But another type, so-called friendly fraud, has become a significant burden for merchants, as the following article describes.

Friendly fraud occurs when a customer makes a purchase online with their credit card, receives the good or service, and then contacts their card-issuing bank to dispute the charge, often claiming they did not make the purchase. The act is particularly problematic for businesses, because not only do they lose the merchandise but they also experience a damaging drain on revenue from the loss of the sale and the cost of responding to disputes.

This type of fraud is often called “friendly” because the customer makes a claim that seems believable. However, if this type of fraud were to occur in a brick-and-mortar shop, it would be called theft or shoplifting. With e-commerce on the rise, it’s vital that both big and small businesses are aware of how to spot it and what steps to take to prevent it.

Ever had a customer report that an item was undelivered or that it didn’t match the product description? While these may seem like harmless claims, they can often be indicators of a fraudulent dispute. When looking to identify friendly fraud, merchants are likely to be far more successful when they know who their customers are and understand their buying habits. These insights help merchants determine whether the behaviour is typical or unusual for a specific customer. Here are some examples of customer fraudulent claims:

  • Reports that the item wasn’t delivered
  • States that the item purchased doesn’t match the online description and now they don’t want it
  • Tells their credit card issuer that they returned the item, but a refund was not processed
  • Says they cancelled the order but it was still sent to them
  • Claims they don’t remember making the purchase so their credit card must have been compromised

It is possible that these claims are valid, which is why it can be so difficult for card issuers to distinguish between fraudulent and non-fraudulent chargebacks. As a result, they often refund both types of customer requests, to the detriment of merchants and their own bottom line. This is why it is important to have key mechanisms in place to limit the chances of it occurring from the start.

Friendly fraud really involves subterfuge on the part of the buyer, and merchants are often hard pressed to conduct a time-consuming manual review of what actually happened. Fortunately, purchase patterns driven by data analytics can often spot the fakers before too much damage has been done. Chargeback control and analysis is another process that can stop fraudsters in their tracks, as well. However, the current reality is that friendly fraud will continue to keep merchants awake at night.

Overview by Raymond Pucci, Associate Director, Research Service at Mercator Advisory Group

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