What is a friendly chargeback?
A friendly chargeback, also called friendly fraud when using credit card, occurs when a customer illegitimately claims a chargeback after paying online for a product or service that they have received. This type of fraud currently makes up the majority of chargebacks for most merchants. There can be different reasons for these chargebacks. In some cases, the customer is simply confused about the purchase made. In other instances, the customer tries to fraudulently get their money back from the bank, rather than claiming a refund directly from the merchant.
The difference between legal chargebacks and fraud
Originally, the chargeback system was thought to be the last resort to protect cardholders from criminal fraud and merchant abuses. A chargeback allows the customer to dispute an amount charged to their bank account by filing a claim with the bank that a purchase is fraudulent. It can happen, for example, when the cardholder’s payment information has been stolen.
Consequently, a cardholder can only dispute a charge via their bank if they are the victim of fraud, perpetrated by the merchant itself or a third person. When merchants believe that the customer’s claim is legitimate, and the latter has been victim of a fraud, they should approve the chargeback.
However, if the customer is merely dissatisfied with a product or a service purchased, they cannot claim a chargeback with their bank. Instead, they must ask for a refund from the merchant. When the customer illegitimately makes claims for a chargeback instead of asking for a refund, it is considered fraud. It thus has legal repercussions.
The most common causes of friendly fraud when using credit card
E-commerce considerably changed our shopping habits and turned the chargeback process into potential fraud. There are various factors that can motivate such behaviour. The following are the most common causes of an illegitimate chargeback.
One of the simplest causes of this type of chargeback is transaction confusion. This occurs when the customer does not recognize a purchase on the banking statement. It may be due to an erroneous billing description, a recurring charge that is not clearly identified, or even a purchase that the cardholder has forgotten. In this situation, the customer believes they are the victim of fraud and may want to dispute a chargeback directly via the bank, claiming the payment was not authorized.
Family fraud or first-party fraud
Family fraud, also called first-party fraud, occurs when a family member or someone in the household makes a credit card purchase without the knowledge or consent of the cardholder. The latter, unaware of the purchase, may assume they are the victim of fraud and file a chargeback.
In many cases, a child of the family is responsible for this type of fraud. Family fraud can transpire rather quickly as e-commerce is continually making it easier and more seamless to purchase online. Furthermore, technology now enables users to store payment information on multiple devices so that payments can be made in just afew clicks.
For instance, family fraud can happen when a member of the family pays to stream a movie online. The payment information stored with the streaming service or on the device is then used for the purchase. As this kind of dispute has become increasingly common, some banks explicitly state that family fraud is not a legitimate reason for a chargeback in their policy.
Customer dissatisfaction happens when a customer is not satisfied with the product or service received and disputes the charge. In this scenario, the customer feels that they have been tricked by a merchant who was intentionally lying. They may want to solve the issue directly with the bank to avoid going through a dishonest merchant. However, this type of chargeback is illegal, and a disappointed customer fares better when asking the merchant for a refund.
In some cases,the cardholder may be motivated by confusion about the origin of the purchase or the quality of the goods and service received, but sometimes chargebacks are purely fraudulent acts. This is called cyber shoplifting. In such cases, the customer makes a purchase with the intention to dishonestly request a chargeback.
After receiving the product or service purchased, the customer may lie to the bank,arguing it was not an intentional purchase or that it was damaged in order to get the money back on their purchase. They may also lie by claiming that they tried to get a refund from the merchant, but the latter refused or simply never responded, although they never actually contacted the merchant to complain.
The trend in fraudulent chargebacks
In truth, illegitimate chargebacks are a major issue for e-commerce businesses both because of its cost and the fact that it is an increasing trend. Friendly fraud is reported as the most common fraud committed against merchants (source: cybersource). In 2021, according to Statista, 75% of e-merchants reported an increase in friendly fraud when using credit card, which would represent up to 32% of their chargebacks.
The consequences of illegitimate chargebacks on businesses
Chargebacks are quite costly for merchants. Their online reputation may suffer, thereby influencing other customers’ opinions of their business. Furthermore, their bank may also consider them a high-risk merchant and charge more fees or decide to terminate their merchant account. Therefore, it is important for e-merchants to prevent and dispute illegitimate chargebacks.
This type of fraud accounts for significant losses for the merchant. These can add up to more than twice the original amount of the transaction. On average, merchants lose 3.75 dollars for every dollar lost to chargebacks (source: LexiNexis). Overall, these illegitimate chargebacks account for 40 to 80% of e-commerce fraud loss (source: Forbes). Furthermore, these fraudulent chargebacks increase merchants’ chargeback ratio, which has negative impact on their bank account as a merchant. As a result, they may be charged more fees by their bank.
Why friendly chargeback is increasing
The main explanation for the increasing number of illegitimate chargebacks is its simplicity. Many merchants consider it too easy to falsely claim chargebacks,and some banks agree with that. Indeed, most customers can currently dispute a charge directly from their banking application on their mobile or online without even speaking to their bank on the phone or going there in person.
More than 80% of customers admit that they filed a chargeback out of convenience, and less than 15% tried to contact the merchant first. As this does not require a significant commitment from the cardholder, it is not so surprising that this kind of fraud is usually repeated. Most friendly fraudsters are repeat offenders, regardless of whether they are intentional fraudsters or simply consider this is a normal part of e-commerce. Customers filing a chargeback are likely to do it repeatedly, and many are likely to do it again within a couple of months. Friendly chargeback is a serious topic for any online business.
Not only is claiming a chargeback easy, but online purchasing has also become so seamless that it can quickly lead to transaction confusion or family fraud. Many online purchases may have unclear descriptions on the resulting credit card statement,such as a different merchant name, making it difficult for the cardholder to recognize the purchase and leading them to think they have been the victim of fraud. With the increasing number of connected devices storing payment information, the possibility of other household members making purchases without the cardholder’s consent increases.
Why high chargeback ratio matters
One of the fundamental issues with fraudulent chargebacks is that it increases the merchant’s chargeback ratio. The chargeback ratio represents the number of chargebacks received by a merchant divided by the total number of transactions. It is calculated over the course of a month.
Some activities are more prone to a high chargeback ratio. With a ratio over 0.9% or 1%, banks usually identify these merchants as high-risk, charging them higher fees for merchant services. Visa and Mastercard also have monthly fines and monitoring programs that they impose on merchants with an excessive number of chargebacks in order to incentivize them to reduce their ratio.
The difference between low-risk and high-risk merchants
All payment processors have their own directives to distinguish low-risk activities from high-risk ones. Yet, there are some common characteristics. Usually, low-risk merchants are dealing with small transaction amounts: around 20,000 dollars per month with an average transaction of 500 dollars. Additionally, the merchant industry itself (for instance, clothes or household goods) or the country it operates in (the EU, the USA, Japan, etc.) may be considered low risk. These merchants have a zero to low chargeback ratio.
On the other hand, certain factors may prompt a high-risk status for a business. This is often the case when a business deals with a high volume of sales (over 20,000 dollars per month) in an industry considered at risk or a country known for a high level of fraud. The most crucial factor remains the chargeback ratio and the industry’s reputation. Friendly chargeback doesn't help getting a good reputation as you can imagine.
Activities that are high-risk for chargeback ratio
Many goods and services regularly used by customers are considered high-risk because of th ehigh probability of chargebacks. One of the most well-known high-risk industries is travel. It includes airline companies, tour operators, travel agencies, travel clubs, and vacation rentals. Indeed, the Covid-19 crisis has illustrated how vulnerable travel businesses in general are to chargebacks as many factors can legitimize a refund and a customer chargeback.
Besides the travel industry, merchants providing other types of good and services may also be considered high-risk merchants. This is the case with many trading activities and legal services (brokering, auctions, gaming, automotive brokers, bankruptcy attorneys, real estate) as well as gaming and gambling businesses (including casinos, lotteries, and sports forecasting).
Some services may also be more likely to be perceived as fraudulent by customers, leading to more customer complaints and a higher chargeback ratio. This is true of activities such as multilevel marketing (MLM), chain emails, mail or telephone sales, rewards and coupon programs, as well as horoscopes or astrology services. This also applies to trending lifestyle advice businesses, such as life coaching, health and wellness products, and “how to” books and websites.
Many digital and technology-related businesses are also considered high-risk. This includes online gaming, hacking services, prepaid calling cards, SEO services,social networking sites, resale smartphones businesses, or VoIP services. This extends further to sensitive activities such as international shipping, import/export activities, money transfers, multi-currency sales, weapons sales, or cigarettes and e-cigarettes businesses.
How to prevent friendly chargeback
When merchants are facing a significant number of chargebacks, they will have a high chargeback ratio, leading to complications. That is why it is so important for merchants to challenge illegitimate chargebacks.
Many of these chargebacks can easily be avoided by preventing them, whether they are intentionally fraudulent or they can be attributed to customer confusion. Reducing customer confusion is key to fighting illegitimate chargebacks. This is a simple hurdle to overcome.
A merchant must first ensure that all the necessary information for understanding the purchase and its billing is available to the customer. The description of the service charged must fit the description made available to the customer. The business name itself must match the name of the business visible to the customer.
To prevent conflicts and chargebacks, e-commerce businesses must be able to communicate quickly and efficiently with their customers. The best method here is to provide customers with a customer service number for their queries and concerns. This number should be clearly indicated on their website or bills of service. This would make it easier for customers to claim a refund rather than contacting their bank. It serves to help confused customers understand the purchase better. It also helps gain the customer’s trust and establishes a good reputation. Merchants should also always notify their customers in advance in the case of recurring payments.
By increasing customer satisfaction with better communication, merchants also decrease the number of chargebacks due to customer dissatisfaction. That is why it is important to always gain the customers’ trust and be available to answer their concerns. Not only does this reduce chargebacks, but it also has a positive impact on the merchant’s reputation and can build customer loyalty.
When illegitimate chargebacks are the result of intentional cyber shoplifting, the merchant can also file a complaint with its bank. This requires the submission of receipts and proof that the transaction was authorized, and the customer was aware of the purchase. It is also recommended that e-merchants use a billingsystem that helps them detect and block malicious customer behaviours and prevent repetitive fraud attempts.