Friendly Fraud 😓

Bro can you give me ₹1000, I’ll return you soon and he doesn’t, is called a friend doing a fraud.

But, today I’ll talk about friendly Fraud of financial system, which is I guess somewhat similar to the example.

What is Friendly fraud ?

Friendly fraud or chargeback fraud, occurs when a customer disputes a legitimate charge made on their credit or debit card. Unlike traditional fraud, here the customer initiates the transaction but claims the charge was fraudulent or unauthorized. Cardholders are legally entitled to file a charge only when they have been the victim of true fraud or when the merchant is uncooperative. But Sometimes, cardholders make believable assertions to get a refund, committing friendly fraud.

Nearly 1 in 4 Consumers Who File Chargebacks Admit to “Friendly” Fraud and estimated $25 billion in losses for businesses worldwide.

There are a few main reasons for friendly fraud —

1. Transaction confusion: The cardholder disputes the charge because they don’t recognize the item on their bank statement and think they were the victim of fraud.
2. Forgetting: Forgetting is one of the most frequent causes of friendly fraud. Customers might overlook an order they placed or miss a charge on their credit card account. Even if they made the transaction themselves in certain situations, the client may contest the charge. Consider a recurring payment.
3. Misconceptions: Misunderstandings are another frequent cause of friendly fraud. Customers could not comprehend the cancellation or return policy or misinterpret the terms and conditions of a transaction. Chargebacks and disputes may result from this. As in the statement’s description of the merchant.
4. Impulsive purchase: It might sometimes result in friendly fraud. Customers could buy something on a whim, repent it afterwards, or change their thoughts about the item or service.
5. First-party fraud: An unauthorized household member uses the card to make a purchase without the cardholder’s knowledge. This may occur if, for example, a household member uses the credit card that is stored on file with the streaming service to pay to watch a movie online.
6. Refund Abuse: In this case, a legitimate client attempted to obtain a chargeback with the sole goal of abusing the system.

How it hurt business ?

Friendly fraud can be costly for businesses. If a merchant loses a chargeback dispute, they may be responsible for paying the full amount of the purchase, plus fees. This can add up quickly, especially if the merchant is targeted by multiple friendly fraudsters.

1. Money losses: One of the most serious consequences of friendly fraud is money loss. When a client challenges a charge and initiates a chargeback, the firm loses the transaction payment as well as any related fees and administrative charges. This may be especially devastating for small enterprises, which may lack the financial capacity to withstand these losses.
2. Reputational harm: If consumers believe that a company is not responding to their issues or is not taking the necessary steps to resolve conflicts, they may post bad comments or reviews online. This can harm the company’s image with present and potential consumers, lessen the possibility of future sales, stymie expansion attempts, and lower customer lifetime value (LTV).
3. Chargeback penalties: vendors with high chargeback ratios may incur penalties from credit/debit card service providers and payment processors, such as increased fees or account termination. This can be a severe risk to enterprises, resulting in income loss and the need to locate other payment processing options.
4. Time and resources: Responding to friendly fraud incidents may be time-consuming and resource-intensive. Businesses may need to collect proof and documents to back up their claim, engage with customers, and respond to chargeback or refund requests. This might take away valuable time and resources from other corporate tasks.
5. Fraud prevention costs: Implementing fraud prevention measures can also be costly for businesses, as they may need to invest in technology, software, and staff training to prevent and detect fraudulent transactions.

What merchants can do to help prevent this ?

1. Educate your consumers about friendly fraud and customer service: Ensure that your customers understand what friendly fraud is and how it might affect your organisation. Excellent customer service can assist to reduce friendly fraud by making consumers happy with their purchases and making them less inclined to challenge a charge. Businesses should respond rapidly to consumer enquiries and concerns and attempt to fix issues as fast as possible.
2. Have simple and clear refund procedures: Make sure your refund policies are simple and easy to comprehend. This will assist to limit the amount of customers who file chargebacks because they are dissatisfied with their purchase.
3. Monitor client behaviour: Monitor consumer behaviour for trends that may suggest friendly fraud. If a consumer makes a substantial purchase and then promptly challenges the charge, this might be a red signal.
4. Use fraud protection tools: A variety of fraud prevention technologies are available to assist you in identifying and preventing friendly fraud. To detect and prevent fraudulent transactions, businesses can utilise fraud detection and prevention systems. Fraud scoring, IP address geolocation, and device fingerprinting are examples of such techniques.
5. Effective customer communication: Friendly fraud may be avoided by having open lines of contact. Businesses should make sure that their clients are informed of their return, chargeback, and cancellation policies. To minimize misunderstanding, they should also include precise web descriptions and images of their goods or services.
6. Clearly spelled out billing descriptors: Companies should make sure that their billing descriptors are understandable to customers. By doing so, issues about unauthorized charges may be avoided.
7. Authentication: Organizations can employ authentication procedures to confirm a customer’s identity and make sure they are legitimately allowed to make a transaction. This may entail employing multifactor authentication or that clients provide a verification code delivered to their email or phone number. Such things like quality checks and risk evaluations during onboarding may be included.
8. Order confirmation: After a consumer makes a purchase, the company ought to send them an email that includes all the necessary details about the transaction, such as the date, time, and purchase amount. Order confirmation emails provide clients with a way to recall the purchase, which may help avoid disputes down the road. They also provide legitimate customers the opportunity to identify any suspected fraudulent transactions as soon as feasible.

Interesting, right ?

Reference :-

Report: Nearly 1 in 4 Consumers Who File Chargebacks Admit to "Friendly" Fraud