Friend or Fraudster? Understanding the Surge in Deceptive Chargebacks

Shocking but true – a whopping 86% of all chargebacks are now classified as cases of “friendly fraud,” where the customer deliberately deceives the merchant into issuing a refund after legitimately buying an item. Far from actual fraud from criminal hacking groups stealing credit card details, this fast-growing brand of chargeback fraud comes from an unexpected source – a business’s own customers.
This attacks the trust relationship that should exist between shopper and store, amounting to nothing less than betrayal through false pretenses for quick financial gain. And as friendly fraud chargebacks have skyrocketed in recent years, merchants can no longer ignore this Trojan Horse style of fraud risk within their checkout cart conversions.

What are Friendly Fraud Chargebacks?

The concept of “friendly fraud” refers specifically to chargeback abuse from a legitimate paying client for illegitimate refund purposes. After intentionally purchasing an item online or instore, the buyer later contacts their bank and falsely claims the transaction was fraudulent, incorrectly processed, or the product arrived defective or not as advertised. 
Under consumer protection chargeback schemes like Visa’s Buyer Claims Process or Mastercard’s Field Reversals, the bank immediately refunds the full purchase amount back to the friendly fraudster’s account – no questions asked. The merchant meanwhile not only loses the product revenue, but gets slapped with numerous chargeback fees from their payment processor for the “trouble”.

The Chargeback Process Explained

So what exactly happens when a chargeback dispute gets kicked off? Let’s break down the step-by-step process: 

•     First, the customer contacts their bank saying they want to dispute a charge that hit their card. This is the cardholder’s issuing bank that gave them the credit or debit card in the first place. 
•     Next, the issuing bank loops in the merchant’s acquiring bank through the card network, giving details about the transaction the cardholder is questioning.
•     The acquiring bank then passes the claim onto the merchant themselves, who can gather evidence to either fight or accept the chargeback.
•     Finally, the issuing bank reviews what the merchant submitted and makes a final call – do they uphold the chargeback by refunding the cardholder? Or reverse it and leave the charge in place? 

This back and forth allows customers to get refunds for problematic purchases, which is good. But as mentioned, it also leaves things open to abuse by the friendly fraudsters out there just looking to score free products.

What Are The Real Costs of Friendly Fraud?

Let’s break down the real costs of friendly fraud disputes. On the surface, it probably seems harmless – a customer gets their money back, no big deal, right? But these bogus claims actually end up costing businesses in more ways than one.

Direct Revenue and Margin Losses

To start with, direct revenue and profits take a hit every time an invalid refund is issued. That product you paid to acquire and produce has now been given away for free. And it’s not just a one-time thing either – some people actually file repeat fraudulent disputes.

Immediate Chargeback Fees

Beyond that, merchants get charged fees by their payment processors for every dispute, whether legitimate or not. These can range from $15-$150 per transaction contested. So not only are you losing the sale, but now getting dinged additional costs on top of it. Those fees add up fast, especially with multiple bogus disputes. 

Increased Time Costs

Then there’s the employee time spent researching claims, gathering evidence like receipts, and filling out paperwork. All that takes valuable hours away from tasks that actually help push your business forward. Before you know it, people are burning whole days dealing with scammers instead of real customers.

Reputational Harm

Lastly, excess unwarranted refunds over time can slowly damage your reputation in the eyes of banks, card networks, and customers alike. Financial partners pay attention to refund patterns – if illegitimate claims become excessive, it could threaten your ability to accept certain payments down the road.

Walking the Fine Line Between Customer Service and Fraud Prevention

Clearly, things aren’t always peachy between shoppers and merchants. It’s understandable that customers want products that work as advertised when they hand over their hard-earned money. And most retailers try their reasonable best to deliver that. But disagreements happen. 
Generally, the system works to smooth over any transactional wrinkles. Except, of course, when scammers exploit this process through exaggerated or downright dubious fraud claims. Yes – constantly getting “free” stuff might sound nice…but is abusing friendly loopholes morally right? 
Merchants shouldn’t take deception sitting down, but declaring all-out legal war on customers usually backfires more than it helps. The best approach lives in the reasonable middle ground – detecting and deterring fraud without also depriving well-intentioned shoppers of their purchase rights.

Wrapping Up

When you get down to it, friendly fraud pops up when some shoppers stop acting in good faith with sellers. Chargebacks serve a purpose, but too much bogus disputing slowly corrodes trust in ecommerce. As such, smart merchants have a tightrope to walk.

However, buy thoughtfully screening for underhand refund requests, having crystal clear policies, and maintaining top-notch customer service— merchants can give honest buyers a smooth experience while still blocking the fraudsters looking for a quick score.