Cyber Monday is still weeks away, but holiday sales have already started to ramp up. This year, holiday season eCommerce sales are 14% ahead of last year, according to the Signifyd Pulse Tracker. That's great for merchants who've been hoping for a booming holiday season. However, it comes with a hefty increase in the risk of both Criminal and Friendly Fraud.
Criminal fraud occurs when the fraudster uses a stolen credit card. In contrast, friendly fraud, also known as chargeback fraud or digital transaction fraud, involves someone using their own credit card. This type of fraud affects both online and physical stores and is widespread across industry sectors. While the terms ‘friendly fraud’ and ‘chargeback fraud’ are often used interchangeably, the intention behind each incident differs greatly and affects how you need to respond. As we head into the busiest season of the year, It’s important to understand why friendly fraud happens, what to look out for, and what you can do about it to protect your business.
Friendly fraud occurs after a customer has purchased goods or services. It starts out looking like a legitimate sale. Once the goods or services have been received by the customer, however, they ask their bank to cancel the financial transaction. They may say that they never received the item or that it wasn't what they were told they had purchased. If the chargeback is successful, the funds are returned to the customer and the merchant is made accountable. While this situation is obviously not ideal for business owners, it’s important to understand the intentions behind these events and act accordingly.
It is important to understand that not all chargeback events are fraud. The chargeback system is intended to protect consumers from dishonest merchants. Consumers can get their money back if a merchant fails to deliver what was agreed on. In some cases, there is a misunderstanding. The product may be delayed but on its way or it may have been delivered to the wrong place because the consumer put in the wrong address. Friendly fraud generally refers to chargeback requests made with malicious intent and intentional deception.
When chargeback fraud takes place, customers will typically try to avoid contact with you altogether. In contrast, when an honest chargeback is made, the customer will usually attempt to contact you and remain transparent throughout the process.
As a business owner, it’s important to focus on your products, services, and customer support to reduce non-fraudulent chargebacks. Even when a chargeback is based on customer error, there may be something you can do to make the transaction process more transparent. Additionally, it’s important to integrate internal and external payment systems in order to recognize the warning signs of fraud. Developing a relationship with a payments processing partner is the best way to reduce dishonest chargebacks and protect yourself for the future.
Fraud is defined as a dishonest and illegal act perpetrated for financial advantage. Because the act of fraud involves deception and a lack of transparency by definition, individual businesses often need help when it comes to defining and managing specific events. Most chargeback incidents fall into one of the following three scenarios:
Malicious fraud – Dishonest acts performed with the sole intent of gaining a financial advantage. While these incidents may be disguised as friendly, this is the fraudulent part of ‘friendly fraud’.
Honest mistakes – Errors by customers may be characterized as fraud but come from good intentions. While these incidents may seem dishonest, this is the friendly part of ‘friendly fraud’.
Honest chargebacks – Systematic internal errors or quality issues due to problems with goods and services, problems with shipping, or problems with recurring billing systems.
To reduce the risk of chargebacks and help prevent Friendly Fraud:
In addition to taking those steps, you can have chargeback management built into your payment processing solution to reduce issues and protect profits.