A growing digital economy has fueled revenue for many small businesses. In fact, e-commerce sales topped $1 trillion for the first time last year. It’s also ushered in record claims of friendly fraud.
As a small business owner, it’s wise to be aware of friendly fraud, also known as chargeback or first-party fraud, and its implications for your business, particularly in an uncertain economic landscape. Friendly fraud happens when customers dispute legitimate transactions. This can cause significant damage for small businesses, since they’ll often lose both money and merchandise in a friendly fraud incident.
To prevent both intentional and accidental friendly fraud, businesses can implement fraud detection tools, create clear policies, and maintain regular communication with their banks.
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What is friendly fraud?
Friendly fraud is a chargeback made by a customer disputing a legitimate transaction. For example, a consumer purchases a product or service with their credit or debit card. Then they dispute the transaction with their bank or financial institution, requesting a chargeback, or return of the funds paid on disputed items. The customer then keeps the merchandise, and the business loses both the money and the product.
Sometimes friendly fraud can be even more painful. If the customer initiates a chargeback with their bank, while also initiating a refund from the merchant, the merchant may unwittingly refund double the amount of the initial purchase.
However, more small businesses are utilizing tools and strategies to safeguard their business and combat friendly fraud. These include chargeback management services, customer follow-ups, fraud detection tools and software, and dispute resolution procedures.
Two types of friendly fraud
There are two primary types of friendly fraud: accidental and intentional. It’s important to know and recognize the difference between the two so you can respond efficiently.
Accidental friendly fraud
Sometimes, a customer starts a dispute process because they simply don’t recognize a transaction on their billing or credit card statement. In these cases, it’s considered accidental friendly fraud. It’s also accidental friendly fraud or shared card fraud if they dispute a purchase made by a family member they share a card with.
In these cases, you can often resolve the situation without losing money on purchases. To prevent this type of fraud, you should establish clear and easy ways for customers to contact your business if they have questions. You can also send itemized electronic receipts to customers to help them recognize transactions later.
Intentional friendly fraud
While most friendly fraud is unintentional, in one study, 17% of people who have filed a credit card dispute reported intentionally engaging in friendly fraud.
For example, a customer might falsely claim that an item was never received or arrived in bad condition and solicit a refund. An intentional fraudster might also claim their card was stolen to keep merchandise and get away with not paying for it.
Subscription-based transactions and installment plan purchases can make your business more susceptible to friendly fraud, as credit card companies may refund several months of subscription fees when customers complain.
Each of these situations describes refund policy abuse. To make it easier to recognize legitimate disputes, you should create clear and visible return or cancellation policies. This makes it harder for intentional friendly fraud abusers to take advantage of your business.
How to prevent friendly fraud
By proactively and consistently addressing friendly fraud, you can position your business to protect your money and merchandise. Here are some best-practice tips to keep your business safe.
Collect and analyze transaction data
Analyzing data can help you prevent some fraudulent transactions from going through. Look for patterns such as customers who frequently complain about your products or services. If you can, pay attention to how these customers find your business. You may be able to shift advertising techniques to target better customers who aren’t looking to defraud your business.
Use fraud prevention tools
Digital fraud prevention tools are available to help detect fraud and stop the activity before it causes major damage. These tools can help you uncover trends, such as past customer behavior that results in high rates of disputes or refunds. If you understand the behavior that occurs before a customer falsely contests a transaction, you can predict and prevent fraud entirely by not doing business with fraudsters in the first place.
Have clear policies in place
One way to counter false chargebacks is to set clear return and refund policies. Communicate these very clearly to customers so they know the process.
It’s also important to provide detailed, accurate item descriptions and photos of your products when you sell online. This can prevent a situation where a customer disputes a transaction because they feel you misrepresented your product.
Communicate with your bank
If you receive a dispute inquiry, the financial institution will request details about the transaction in question. Regardless of if you feel the inquiry is fraudulent, you should communicate in a timely fashion with your bank. This will increase your reputation as a business, which can go a long way when you’re fighting against friendly fraud and can speed up the dispute process.
If you recognize a chargeback as a legitimate transaction by a valued customer, contact your bank immediately if you don’t want to dispute the refund. This will exhibit excellent customer service and preserve your brand impression with the customer. You should also follow up with the customer to see if there’s any way you can serve them better or help resolve their issue.
Set limits on automatic refunds
To prevent friendly fraud from occurring on higher-dollar transactions, consider setting a limit on automatic refunds. As a bonus, by offering automatic refunds on lower-amount purchases, you can save yourself, your customer, and your bank time by avoiding a manual dispute process on lower risk transactions. That way, you can continue running your business without unnecessary interruption.
Friendly fraud is a growing issue for small businesses, especially those who sell online. By being vigilant, setting up refund policies, and tracking fraud trends, you can stop friendly fraud before it happens, and save you and your customers time, money, and merchandise.
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