July 31, 2022
Data breaches, and payment card fraud are growing concerns for merchants as transactions become more and more digitized. One form of fraud that’s troubling merchants and often overlooked is first party misuse, also known as friendly fraud or chargeback fraud.
When we think about fraud we typically think about stolen identities or stolen credit cards. Friendly fraud in general, is when a customer reviews their credit card statement and notices a transaction that they believe is fraudulent. They then issue a chargeback when in actuality they received the goods or someone in their household made the purchase.
Chargebacks are when a customer disputes a transaction – typically when they find a fraudulent transaction on their credit card statement.
According to Visa, friendly fraud accounts for up to 75% of all chargebacks. Nearly one in five consumers who have filed a chargeback committed friendly fraud, contributing to business losses of over $25 billion a year according to a 2021 report by SIFT.
Here are some examples of chargebacks that would be considered friendly fraud:
Forgotten recurring subscriptions: Consumers often subscribe to free trials and forget to cancel their subscriptions. Often the merchant has no problem refunding the amount during a certain grace period, however this certainly can add up overtime.
Don’t recognize a transaction: In some cases a family member or parents’ children may have gotten access to their credit card or Amazon login. Sometimes a customer just forgets they made a transaction. Another possibility could be customers not recognizing the merchant name on their credit card statement.
Avoiding a return: Consumers may feel like they don’t need to go through a merchant’s return process or simply don't understand the return policy. Instead, they will file a chargeback to try to get a refund and keep the product.
Missing delivery: Proof of merchandise not received are a common chargeback however, sometimes customers may claim they never received the product even though they have.
Unhappy with product or service: Rather than working with the merchant to remedy the situation, the customer may file a chargeback.
Chargebacks negatively impact merchants both in time spent on these false claims and costs. In addition, this can increase a merchant’s chargeback ratio which will negatively affect their business.
Some ways to prevent friendly chargebacks include following PCI DSS compliance, ensuring your hardware is EMV compliant and developing clear consumer facing business policies.
Visa recently announced some good news to help merchants reduce merchant fraud related to chargebacks.Starting April 15, 2023, merchants will have the ability to provide more information against first party misuse. Partnered with the Merchant Risk Council (MRC) and Merchant Advisory Group (MAG), merchants will be able to provide additional evidence to support valid charges in the case of friendly fraud.
“We’ve seen first-hand how first-party fraud is a financial burden for merchants. The updates Visa is making will help improve protection for small businesses and merchants against friendly fraud,” says John Drechny, CEO of MAG.