Strategies to navigate the surge in friendly fraud

Beyond the direct costs of managing chargebacks, which can range from $15 to $50 per transaction,² chargeback fraud can lead to other losses such as reputational damage. Time and resources spent disputing chargebacks can also divert attention from core business operations, further impacting a company’s efficiency.

In today’s dynamic financial climate, it’s more important than ever for enterprises to prioritize friendly fraud prevention. Read on to learn approaches for reducing friendly fraud.

Understanding the growing threat of friendly fraud

Friendly fraud, also known as first-party fraud, occurs when a customer disputes a legitimate charge in hopes of receiving a refund on their transaction. While this type of fraud doesn’t involve illegitimate payment methods, it’s a practice that comes at a high cost to merchants due to revenue loss and chargeback fees.

Friendly fraud can occur for several reasons, such as:

• The customer made the purchase by mistake or ordered the wrong item.

• The customer did not remember making a purchase once they saw their bill.

• A known family member or friend used the customer’s card without permission.

• The customer suffered from buyer’s remorse.

For example, a shopper purchases a bottle of perfume from an online retailer. Upon receiving the package, they realize the scent doesn’t match what they expected. Rather than request a refund or exchange from the retailer, they contact their card issuer to complain that they haven’t received the goods, which allows them to file a chargeback on false grounds.

While merchants may be able to withstand isolated cases of friendly fraud, it's occurring with more frequency due to the rising prevalence of online shopping, delivery issues, increases in the cost of living, and generous return policies.

In one 2023 survey of more than 300 retailers, nearly 75% of retailers – from small businesses to enterprises – experienced a 19% average increase in friendly fraud, with more than 50% of respondents saying that friendly fraud is a significant or moderate concern for their business.³

The same survey found that most consumers are unaware of what happens behind the scenes when they file a chargeback. One report found 72% of shoppers considered filing a chargeback a valid alternative to requesting a refund from a retailer, and more than 50% admitted to filing a chargeback without contacting the merchant first.³

Given these misconceptions, friendly fraud represents 61% of all chargebacks businesses receive,⁴ inflicting significant financial strain on their profit margins.

The financial and reputational impacts of friendly fraud

When friendly fraud occurs, merchants are hit by chargeback fees that can vary significantly depending on the transaction, the payment processor, and the number of chargebacks they see (the more chargebacks in a customer’s file, the higher the fee).

The decision to either accept these fees or enter a dispute is fraught with its own challenges. Engaging in disputes requires a substantial investment of time and resources, yet failing to do so leaves merchants vulnerable to increased fees and potential abuse of generous store policies.

Beyond the immediate financial burden of chargeback fees, businesses must also contend with several indirect costs, including:

• The loss of goods.

• The need for additional processing efforts to manage disputes.

• Reputational damage from high chargeback rates, which can deter potential customers and erode trust among existing ones.

• Stricter store policies that may impact the shopping experience for genuine customers, which could inadvertently lead to reduced sales.

To address these challenges, merchants must monitor upcoming fraud trends carefully and employ strategies that address chargeback patterns – all while maintaining a positive and seamless shopping environment.

Proactive measures to combat friendly fraud

To combat friendly fraud and protect your business from financial and reputational damage, consider the following strategies:

• Conduct risk assessments and ensure compliance. Risk assessments can help identify vulnerabilities in the customer journey while ensuring PCI DSS compliance safeguards payment processes.

• Collaborate with fraud protection experts. Fraud protection experts can offer valuable and actionable insights to prevent friendly fraud for your specific business.

• Proactive fraud monitoring. Continuous monitoring and real-time alerts provide an essential layer of defense against fraudulent activities. For example, PayPal’s Fraud Protection Advanced empowers merchants to conduct in-depth fraud analysis to monitor transactions in real-time to spot patterns and behaviors that are suspicious.

Learn more about how to reduce chargeback costs with PayPal’s Braintree fraud solutions.

Navigating the challenges

By automating the management of chargeback disputes, merchants can reduce both the time and resources traditionally required for manual oversight. This speeds the response time to chargeback requests and enhances the accuracy and consistency of dispute submissions.

Logging and handling disputes quickly upon receipt ensures no claims are missed due to delays, bolstering the chances of successful resolutions.

This process can save merchants time and provide a thorough and consistent defense against unwarranted chargebacks, helping to discourage future friendly fraud incidents.

Leveraging advanced technology in fraud prevention

A 2022 study found that seventy percent of companies deploy three or more tools to prevent e-commerce fraud prevention efforts while ensuring a seamless consumer experience.⁵ One way to adopt a multi-layered approach for your fraud prevention strategy is with artificial intelligence (AI) and machine learning (ML).

By enabling advanced analysis of transaction data and consumer behavior, AI and ML excel in identifying patterns that may suggest fraudulent activities, spotlighting transactions that warrant closer scrutiny.

Machine learning offers a dynamic approach to payment fraud detection. Leveraging machine learning for payment fraud detection allows merchants to swiftly pinpoint potential threats and effectively tackle friendly fraud attempts. This is especially important during times like the holiday season when the surge in transactions can often obscure attempts at friendly fraud.

As the rise of fraud incidents continues, AI and ML provide businesses with insights into fraudulent behaviors, unveiling specific vulnerabilities within their transaction processes. This deepened understanding empowers merchants to tailor their fraud prevention strategies more effectively.

Protect your business against friendly fraud

In today's challenging financial landscape, friendly fraud poses an increasingly significant risk to businesses. Ignoring the threat of friendly fraud could lead to a cascade of chargebacks, as merchants may inadvertently gain a reputation for being vulnerable to exploitation.

Additionally, the fallout from negative customer feedback, spurred by fraudulent claims of missing goods, could erode trust among genuine customers, further impacting revenue.

With many facing the pressure of navigating high volumes of chargebacks and safeguarding their reputation, it's essential for businesses to explore proactive measures and protective tools. Learn more about PayPal’s Fraud Protection Advanced solution.