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Best Practices for Fighting Friendly Fraud

Monday, December 17, 2018

Consumers sometimes have good reasons for filing a chargeback, like when they fail to receive merchandise or when they accidentally don't recognize the merchant name that appears on their credit card statement.

But in recent years, merchants have seen a rise in “friendly fraud” chargebacks, which occur when a consumer makes a purchase with their credit card, but then requests a chargeback after receiving goods or services. In fact, according to chargebacks911.com, friendly fraud has been increasing by 41 percent every two years.

As such, it pays to educate yourself about the nature of friendly fraud and how to minimize its impact on your business.

Common Reasons for Friendly Fraud Chargebacks

A good place to start is with the reasons why consumers request chargebacks for merchandise and services received. In an e-book titled There's No Such Thing as Friendly Fraud, the co-authors highlight the most common reasons for friendly fraud chargebacks, which typically occur when:

  • A friend or family member makes a purchase without the cardholder's knowledge or permission
  • The consumer experiences “buyer's remorse” and requests a chargeback instead of a refund or exchange
  • The time period in which a refund is allowed has expired
  • A customer maliciously requests a chargeback as a means of stealing the merchandise; this is sometimes referred to as intentional digital shoplifting

Then there are consumers who “freely admit to filing a chargeback out of simple convenience,” because they don't want to be bothered with resolving an issue with the seller—or perhaps because the seller has chosen to keep consumers at arm's length in an effort to reduce customer service expenditures.

Regardless of why shoppers are filing fraudulent chargebacks, the cost to merchants like you can be substantial, both in terms of money as well as time and resources.

Meanwhile, merchants also commonly fret about the time needed to:

  • Understand chargeback rules and the chargeback process
  • Gather the data necessary to win representments
  • Pick and choose which chargebacks to challenge

Visa Claims Resolution, Ethoca Eliminator

The good news is that the industry is making it easier and easier for merchants to respond to chargebacks.

For example, Visa Claims Resolution (implemented in April 2018) has simplified the chargeback dispute process, with the goal of resolving chargebacks more quickly and preventing invalid disputes from entering the process. Meanwhile, Mastercard® is reportedly working on a new dispute-resolution strategy of its own, which is likely to be different than that implemented by Visa®.1

More recently, American Express® announced a partnership with Ethoca, (a solution TSYS has partnered with since 2016), which aims to help merchants reduce the time and cost spent on handling disputes. Specifically, “with Ethoca Eliminator, American Express can help prevent disputes for U.S. merchants by providing more detailed transaction information in real-time to card members who call customer service because they do not recognize a charge on their account.”2

Moreover, “the Ethoca Eliminator tool complements Ethoca Alerts, an existing solution American Express uses to notify participating merchants about transactions that have been confirmed as fraudulent,”3 giving merchants the opportunity to potentially stop the delivery or shipment of orders before they are sent.

Finally, like Visa, American Express has made several updates to its disputes and chargeback policies, including “providing additional ways for merchants to appeal chargebacks involving online transactions, reducing the number of times a merchant can receive a dispute for the same charge, and in certain categories eliminating chargebacks if a dispute is over 120 days from the transaction date.”4

Tips for Preventing Friendly Fraud

As for tips for preventing fraudulent chargebacks, ClearSale offers eight bits of helpful advice, including encouraging customers to call you before filing a chargeback, sending e-mail order confirmations that include your return policy, requiring customers to provide their three- or four-digit CVV number when placing orders, and making sure the business name that displays on customers' credit card statements will be recognizable to them.

At the same time, it's also a good idea to review our advice on how to prevent chargebacks, an article that also highlights the warning signs of card-present and card-not-present fraud.

After all, the consequences of failing to minimize the number of disputes and failing to properly respond to chargebacks can extend beyond loss of revenue and higher payment processing costs. For one, you could become a target for repeated fraud if ill-intentioned customers recognize that you don't respond to chargebacks.

1 Welcome to the Open World: When Payments Go Wrong, International Banker, https://internationalbanker.com/technology/welcome-to-the-open-world-when-payments-go-wrong/
2 American Express Partners With Ethoca to Simplify Transaction Disputes for U.S. Merchants and Card Members, Business Wire press release, October 15, 2018.
3 American Express Partners With Ethoca to Simplify Transaction Disputes for U.S. Merchants and Card Members, Business Wire press release, October 15, 2018.
4 American Express Partners With Ethoca to Simplify Transaction Disputes for U.S. Merchants and Card Members, Business Wire press release, October 15, 2018.