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Friendly Fraud - How Customers are Scamming Stores They Shop at Frequently

Friendly Fraud - How Customers are Scamming Stores They Shop at Frequently

Dissatisfied customers are an inevitable part of business, and whether those shoppers are unhappy about your products, service or delivery, the wisest course of action is to simply refund their money. 

You lose that sale — and you may even have to pay extra for return delivery and restocking, but the alternative is worse. 

Dissatisfied customers can initiate the refund process on their end through a “chargeback.” If this happens, you still lose that sale, and you’ll still have to pay out of pocket for delivery and restocking. 

Yet chargebacks also expose you to penalties, downgraded merchant benefits and greater scrutiny. If you rack up enough chargebacks, your merchant account could even be terminated. 

It gets worse. 

Sometimes, customers’ “dissatisfaction” isn’t genuine, and when they force you to refund the purchase, they’re engaging in chargeback fraud. 

This trend is also known as “friendly fraud” — but there’s nothing friendly about it. These are customers who knowingly buy something from you with the intention of keeping both the product and the money. 

It’s basically online shoplifting. 

What is a Chargeback?

Why Chargeback Fraud is so Easy to Commit

The modern chargeback can trace its roots back to the Truth in Lending Act of 1968 and the Fair Credit Billing Act of 1974. These consumer protection laws were established well before the Internet ever arrived, and there haven’t been many updates to these laws in the years since. 

As a result, credit card companies make it easy for their customers to start the chargeback process. It’s just a simple form and a mouse click. On your end, however, you must now deal with calls, emails, documentation and disputes — all of which can take months to sort. 

The ease with which customers can abuse the system explains why dishonest chargebacks account for 71 percent of  all fraudulent losses nationwide. All one has to do is claim that the product was never ordered, didn’t arrive, was defective or was damaged. Customers can also claim that the product didn’t match its description. 

These are all valid reasons for initiating chargebacks — and dishonest customers are only too eager to exploit the system. 

Chargeback fraud can also result from simple laziness. According to one study, more than 81 percent of credit cardholders initiated a chargeback because they “didn’t have time” to request a refund directly from the merchant. 

Friendly fraud isn’t simply a widespread problem — it’s also an expensive one. According to a LexisNexis , for every $1 in fraudulent chargeback losses, merchants must spend an additional $2.40 on restocking, replacements and fees. 

However, there are steps you can take to reduce the frequency of chargeback fraud within your store. 

How to Protect Yourself from Chargeback Fraud

The first step is detection, and that’s the easiest part since customers must provide a reason for initiating each chargeback. These reasons are assigned universal codes. For example, #4855 means the product never arrived or the service was never delivered. 

If you’re dealing with a lot of chargebacks — whether legitimate or fraudulent — you can use these codes to pinpoint the source of the problem: 

  • If products (allegedly) don’t arrive, start using tracking numbers. 
  • If products (allegedly) arrive damaged, use a different delivery service. 
  • If products (allegedly) don’t perform as promised, choose a different supplier. 
  • If products (allegedly) aren’t as described, then update your product descriptions with better copy, videos and pictures. 

None of this will actually stop friendly fraud, but it will make it harder for abusers to provide fake reasons. As a bonus, it’ll reduce chargebacks across the board. 

Here are some additional steps you can take to protect yourself. 

1. Request More Information 

During the checkout process, you should request more information from your customers, including: 

  • Shipping and billing addresses 
  • Usernames and passwords (i.e., no more “guest” shopping) 

This will make it harder for users to claim that they didn’t order these products.

 2. Simplify Your Refund Policy

You should make your refund policy as easy to find, understand and initiate as possible. This won’t stop fraud altogether. In fact, it might even create more refunds across the board. 

However, this approach offers two important benefits: 

  • It makes it easier for “lazy” customers to request a refund rather than initiate a chargeback. Plus, it’s much better (and cheaper) to simply return the money right away. 
  • It makes it easier to defend yourself during the dispute process. If the customer could have contacted you — but didn’t — your case becomes a little stronger. 

3. Tweak Your Recurring Billing

Chargeback fraud is a huge problem for subscription-based businesses that rely on recurring billing. People sign up for your service and then forget about it. When they see a new charge on their statements a year later, they call their credit card companies to reverse the purchase. 

If at all possible, move to a monthly billing cycle. If you can’t, be sure to send a friendly reminder before the annual subscription is about to be charged again. 

The Best Defense Against Chargeback Fraud

None of the above strategies will stop friendly fraud in its tracks. Until consumer protection laws are revised for the Internet Age, there will always be abusers. 

Nonetheless, there is one final step you can take to protect yourself. 

You should challenge every chargeback that enters your system. Don’t let any of these claims slide. Because if you do, then you are technically at fault. 

That’s how the banks will see it anyway. 

They’ll interpret your silence as an admission of guilt. Thus, when future chargebacks come along, these banks will be far less willing to take your side. After all, you are clearly an irresponsible merchant. 

You should fight every dispute that you can. It’ll help if you maintain as much documentation as possible, including receipts, emails, product descriptions and delivery notices. 

Yet even with all this paperwork in order, disputes take time and money. 

However, not challenging these chargebacks is arguably more time-consuming and more expensive in the long run. 


Topics: E-Commerce and Online Payments, PCI Compliance and Fraud Prevention

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