What is friendly fraud and how to prevent it

March 9, 2022

The Bolt Team

Burglar innocently committing friendly fraud

In 1974, Congress passed The Fair Credit Billing Act to protect consumers from unfair credit billing practices. The law enabled shoppers to fight against criminals who used stolen credit card information to purchase items.

Since then, consumers can easily dispute false charges that appear on their credit card statements. But that has had a harmful unintended consequence for merchants. Merchants now have to try to prevent a new type of fraud: friendly fraud.

The incidence of friendly fraud, also referred to as chargeback fraud, has climbed because of the increase in online shopping due to COVID, and now chargebacks account for one out of 2,000 online transactions, many of them friendly fraud disputes

Here’s everything retailers need to know about friendly fraud and how to combat it.

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What is friendly fraud?

Friendly fraud occurs when consumers purchase goods or services with their credit card and then dispute the item when it shows up on their statement. 

Not all disputes are friendly fraud. For example, a consumer might forget they purchased an item. Or they may not recognize the merchant name and worry that it’s a fraudulent transaction.

But friendly fraud is deliberate. Because of the protections given to consumers, they know they can buy a service or product and get away with not paying for it. 

Here’s how it works: The cardholder disputes the charge, claiming the purchase was fraudulent. Credit card companies and banks always side with consumers in credit card disputes. So the item is removed from the customer’s statement while it’s in dispute.

According to recent research, the service industry has seen a sharp rise in friendly fraud, such as restaurants and other service providers

Merchants who do not offer EMV readers are especially at risk. EMV is the payment technology used by credit and debit cards with an embedded chip that increases the security of cardholder transactions. 

If a merchant does not have an EMV card reader and a customer requests a chargeback, the merchant may be liable for the fraud

The Ecommerce industry has also seen a steep rise in friendly fraud because these purchases are considered “card not present” purchases by default. The industry has yet to find a way to leverage EMV chips for online purchases.

How does friendly fraud hurt your business?

As cited earlier, friendly fraud has seen a sharp rise recently, especially with the surge in online shopping that was brought on by the pandemic. The 2022 Chargeback Field Report found that 94% of merchants view friendly fraud as an issue for their business while less than 30% are successful in fighting these disputes. 

Why are so few merchants able to successfully combat friendly fraud? The study said that one-third of merchants surveyed can’t distinguish friendly fraud from genuine claims. That being the case, many merchants don’t even try to contest these claims. 

Of those that do, at least 31% experience roadblocks. The current pro-consumer environment makes it too difficult to argue their case. 

How to detect friendly fraud

Look for three signals that you may be dealing with friendly fraud:

1. Larger than normal order sizes

If a customer makes an order that’s larger than usual or larger than your average order size, it might indicate friendly fraud. 

Tip: Implement a system like Bolt that detects anomalies in shoppers’ order sizes. If you aren’t able to automate this process through a fraud detection system, try implementing a process for manually analyzing order size. Your spreadsheet is your friend in this case.

2. Higher frequency of orders

Another possible sign of friendly fraud is when a customer’s order frequency rises unexpectedly. 

Tip: Bolt analyzes customer’s shopping behavior for unusual activity. We automate this so it’s less onerous on you and your staff.

3. Is the item commonly stolen?

The final step is to identify whether the item being purchased is a commonly stolen product. Designer clothes, designer handbags, and high-tech drones are frequently stolen, for example. If a chargeback occurs with these types of items, it could indicate friendly fraud.

What steps can you take to prevent friendly fraud?

Whether you’re able to detect friendly fraud or not, there are ways you can prevent it from happening in the first place.

Call customers to validate the purchase 

If you identify a suspicious transaction, flag the order for further investigation. For example, if your average transaction is $350, a $3,000 purchase warrants an inquiry.  

Reach out to the customer to verify that the purchase was legitimate. Be sure to record the conversation. It could come in handy later when settling a dispute with the merchant bank.

Document evidence of product delivery 

Most e-commerce orders are delivered to the customer’s front porch, creating a situation that’s easy to exploit. Consumers can easily get away with submitting a fraudulent chargeback request, claiming the item was stolen or that it was never delivered.

To prevent these types of claims, require your delivery service to collect a signature upon delivery. The signature is evidence that your customer did receive the package.

Deliver exceptional customer service

Friendly fraud straddles the line between intentional maliciousness and consumer laziness. For example, if a shopper sees a problem with their order and can’t easily contact your online store, the path of least resistance is often a chargeback claim.

As a merchant, you can avoid this by providing exceptional customer service. Build a relationship with your shopper to establish goodwill. That will encourage dialogue if they have a real problem and lower the likelihood of a chargeback claim.

Here are three ways to do that:

  • Provide easy-to-use communications tools, such as online chat.
  • Set up personalized automated emails that trigger when a customer files a chargeback claim.
  • Initiate outbound phone calls to customers who leave a negative review or show other signs of dissatisfaction.

When your customer feels respected, they’re less likely to commit friendly fraud. If they have an issue with a purchase, they’ll be more likely to alert you to the problem instead of filing a chargeback claim.

Use customer deny lists

Another way to prevent friendly fraud is to assemble a list of customers likely to file false chargeback claims. Identify shoppers who have initiated fraudulent disputes in the past and add them to the list. 

A customer deny list can help you prevent repeated attempts at friendly fraud. It can also help you identify and stop new attempts before they happen. Bolt does this automatically for its merchants. If a shopper shows up on a black-list, we will block any attempt from them to make an illegitimate purchase. Of course, the retailer has the discretion to override our decisions when need be. 

Use a fraud detection tool

Finally, you can use technology to assist you. Bolt offers a fraud prevention platform that leverages advanced machine learning algorithms and manual reviews from in-house risk analysts. This multilayered approach delivers a 99% order approval rate.

Bolt will also cover 100% of the cost associated with fraudulent chargebacks you might experience. Automated reimbursements and indemnification protection give you the confidence you need to fulfill orders without worrying about potential losses or liability from friendly fraud.

Preventing friendly fraud

Chargebacks are a godsend to consumers, empowering them to recover stolen funds and stop unauthorized charges to their accounts.

But the chargeback process hasn’t been as helpful for merchants. It created a loophole that allows consumers to commit fraud themselves. 

Fortunately, there are ways to detect and prevent chargeback abuse. You can identify the tell-tale patterns, such as higher than normal purchase amounts or purchase frequency. You can also use customer deny lists to flag shoppers with a higher tendency to commit friendly fraud. 

And you can take steps to keep friendly fraud from happening in the first place. Delivering excellent customer service and providing easy-to-use communications tools on your e-commerce website are some of the ways to delight your customers and reduce friendly fraud incidents.

But the best protection is to leverage advanced fraud detection technology, such as Bolt. Not only will Bolt help you prevent friendly fraud, we’ll also represent you during disputes with banks.

ThinkShop by Bolt does not constitute professional tax or financial advice. Contact your own tax or financial professional to discuss your situation.