Friendly Fraud

Friendly fraud is an unintentional form of first-party fraud, where the cardholder themselves take advantage—unknowingly or accidentally—of a chargeback or return system. Essentially, the cardholder requests an illegitimate refund or chargeback that they are not actually entitled to (when they believe they are).

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The ‘friendly’ part of “friendly fraud” comes from the fact that this type of fraud is often unintentional. Accidental friendly fraud can happen, for instance, if a person doesn’t recognize a charge on their payment card statement, a family member uses a person’s payment card to purchase something without their knowledge, or an error is made on the merchant’s end.

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Technically, any intentional version of friendly fraud would amount to another form of fraud, such as chargeback fraud or refund fraud; whereas any legitimate chargeback or refund claim wouldn’t constitute fraud at all. When it comes to friendly fraud, the person committing it may not even realize what they are doing is taking advantage of the merchant or that it’s costing them money, goods, or services.

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Friendly Fraud vs. Chargeback Fraud

Friendly fraud is a type of chargeback fraud or refund abuse committed by the actual cardholder—because of this, the term ‘friendly fraud’ is often used synonymously with chargeback fraud. There is a difference between them, though.

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True chargeback fraud is a case of first-party fraud where the cardholder intentionally exploits the chargeback system by claiming a chargeback they know they are not legitimately entitled to.

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Friendly fraud is a case of first-party fraud where the cardholder unintentionally makes a chargeback or refund claim that they don’t know is illegitimate. It still counts as ‘fraud’ though, because the claim itself is still illegitimate, coming at the cost of the merchant, financial institution facilitating the transaction, or both.

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Friendly fraud occurs when consumers don’t understand the nuances of the refund policy, and are requesting a refund they aren’t actually entitled to (based on the condition of the item, for example). It could also be because of an error on the merchant’s end, at least in part. It could even simply be due to customer confusion—where the customer doesn’t remember the purchase or thinks it was supposed to be for a different price.

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Friendly fraud is commonly referred to as chargeback fraud, because it commonly involves an illegitimate chargeback request on behalf of the cardholder. However, it can also be related to refund abuses where the customer isn’t aware that they are attempting to gain something they aren’t legitimately entitled to—such as a refund, a replacement item, or a lower price.

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Is Friendly Fraud Illegal?

As a type of chargeback fraud and refund abuse, friendly fraud is counted by the laws of some jurisdictions as a form of payment card fraud or wire fraud. So can you go to jail for friendly fraud? It’s technically possible, but not very likely. There are two major reasons why.

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The first is that it’s difficult to prove intent with friendly fraud. As mentioned, most friendly fraud chargebacks are merely the result of misunderstandings or honest mistakes by customers or merchants. Rarely does a customer commit friendly fraud to defraud a merchant intentionally. With friendly fraud, it’s almost impossible to prove their intent to defraud a merchant or organization unless there are repeated attempts to exploit the system—and even then, the consumer may not realize what they are doing amounts to fraud.

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The second reason is that a single customer usually doesn’t commit friendly fraud often enough, or for high enough purchase values, to justify a merchant spending the time and money necessary to take legal action against them. In some cases, however, if the same customer repeatedly commits friendly fraud, leading to significant inventory and sale losses for a merchant, the merchant may file a civil lawsuit against that customer—or even a criminal one, in extremely serious cases.

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Unfortunately for merchants and financial institutions, this question of intent makes it exceedingly challenging to identify friendly fraud from legitimate chargeback fraud or refund fraud attempts—and even harder to prove in a court of law.

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There are other friendly fraud consequences, though. A merchant may stop allowing a repeat friendly fraudster to return items, or stop doing business with them altogether. Financial institutions may also penalize frequent friendly fraudsters by downgrading their credit scores, or by not allowing them to bank with that institution anymore.

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Friendly fraud happens for several reasons. Many of these are unintentional and caused by misunderstandings, accidents, and honest mistakes. There are times, however, when friendly fraud results from a customer trying to game the system maliciously. They may be trying to get out of a purchase they feel they shouldn’t have made, artificially simplify and speed up a refund, or even profit at a merchant’s expense.

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Even more confusing, the fraudster may not see what they are doing as a form of fraud, but simply an exercise of their consumer rights.

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Here are four common forms friendly fraud takes.

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Merchant Error

Sometimes, friendly fraud is due to a mistake on the merchant’s part. This could be something like overcharging for a product or service; failing to deliver an order by a specified date; delivering an order that’s defective or totally not what the customer ordered; or failing to provide a refund despite a customer filing a legitimate return.

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In most of these cases, chargebacks are justified if the customer has proof that the merchant made an error and didn’t at least try to rectify the situation. However, if the customer ignores the merchant’s official return process or doesn’t provide proof, this could be friendly fraud (or an intentional case of chargeback fraud or refund fraud).

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Customer Confusion

Many instances of friendly fraud happen because transaction details or return policies are poorly presented or explained.

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In the former case, a customer may file a friendly fraud chargeback because they don’t recognize a transaction from its description. So they may conclude that a merchant posted it by mistake, or that someone else has unauthorized access to their payment card.

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In the latter case, the customer may file a chargeback because they think going through the merchant’s actual return process is too much of a hassle.

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Family Fraud

This type of friendly fraud happens when a member of a person’s household (usually a child) gains unauthorized access to that person’s payment card credentials and uses them to make a purchase (intentionally or otherwise). Then the legitimate cardholder files a chargeback or refund request.

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This amounts to friendly fraud when the claim being made by the cardholder isn’t, in fact, legitimate, even though they believe it to be legitimate when they are making it. For example, the cardholder’s spouse—with permission from the cardholder—makes a payment with the partner’s credit card; later, the cardholder forgets about the purchase and makes a chargeback or refund request. The cardholder believes their request to be legitimate, but the claim is actually illegitimate and is—in the eyes of the merchant or FI—a fraudulent request.

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Refund Fraud

Despite refund fraud typically involving intentional abuses of a return policy, friendly fraud can occur when a cardholder accidentally requests an illegitimate refund. For instance, a person may get “buyer’s remorse” and want to take back a purchase simply to conserve the spent money, even if the product wasn’t at all defective or misrepresented. Although the refund policy prohibits this, consumers may not realize their request is illegitimate.

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Similarly, a person may see a purchase on their credit card statement for an item they’ve already returned, but they forget they’ve returned it, prompting them to file a chargeback request for the item. Or a person may skip a merchant’s official return process—even a relatively fair one—and file a chargeback, thinking it will get them their money back faster and with less work. In the context of refund fraud, friendly fraud occurs when the person making the refund request doesn’t realize that their request is illegitimate based on the return policy.

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Despite friendly fraud often being unintentional, both merchants and financial institutions still don’t like dealing with it. Here are some reasons why.

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• Lost sales: The ultimate result of any kind of chargeback is that a merchant loses money they would have otherwise earned by selling a product or service. They may even lose more money if a fraudster attempts to double-dip on a refund.

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• Lost inventory: Merchants selling physical products can also lose some of their stock to friendly fraud if a customer files a chargeback or refund, but then dishonestly keeps or resells the item they purchased.

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• Chargeback fees and penalties: It costs money for financial institutions to process chargebacks, which are usually passed on to the merchant. Merchants that have excessive numbers of chargebacks filed against them can also incur other financial penalties, such as having their credit ratings downgraded.

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• Defeats the point of return policies: Merchants have return policies to describe proper and fair methods for returning problematic orders, as well as the conditions under which certain products or services are eligible for refunds. Many cases of friendly fraud ignore—or at the very least circumvent—this.

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• Puts financial institutions in the middle: Friendly fraud involves a financial institution in a customer-merchant dispute that it didn’t need to be a part of if proper return policies had been followed. Having to then make a judgment in favor of the customer or the merchant can result in the financial institution losing the trust of the party it ruled against.

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So if friendly fraud is so problematic, how do merchants stop it from happening? The following section will discuss some strategies for how to prevent friendly fraud.

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Preventing friendly fraud is largely a matter of information and communication. Businesses are at less risk of friendly fraud when they communicate order statuses, transaction details, and return policies to customers promptly and in language they can understand.

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They can also reduce friendly fraud by knowing their customers and what their typical purchase patterns are. This allows businesses to flag potentially suspicious activity, then perform look-back reviews to see if it matches how the customer usually shops.

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Here’s a closer look at four friendly fraud prevention strategies.

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Communicate policies and information to customers clearly

An effective way to avoid friendly fraud due to customer confusion is through clear communication. When writing transaction descriptions for payment card statements, make sure they resemble the company’s name (and the actual purchase, if allowed) as precisely as possible. It should be obvious to a customer who the charge is from and what it specifically is.

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Also, return and refund policies should be easy-to-understand and accessible. That includes posting them on the company website, as well as dictating them, writing them out, and including a link to them with every order. Customers should also be given working and accessible contact methods to ask a company questions if something about an order or policy isn’t clear.

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Create a paper trail for both the business and the customer

Businesses should take reasonable steps to create transaction records for both themselves and their customers. Examples include sending a customer an email with a copy of their receipt after a sale, implementing package tracking, and requiring proof of delivery.

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This helps to prevent friendly fraud in at least two ways. First, it keeps a customer updated on the status of their order, so they’re less likely to impulsively file a chargeback or refund due to a lack of information. Second, it serves as evidence for the business to dispute chargebacks and returns where a customer mistakenly or falsely claims that something happened or didn’t happen with a transaction (like they never made the purchase or their order never arrived).

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Watch out for suspicious purchase patterns

Even though friendly fraud is often accidental, some consumers can continue to make friendly fraud purchases. They may repeat a fraudulent process, thinking they are simply taking advantage of a loophole in the merchant’s return policy (but not realizing what they are doing amounts to fraud).

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If instances of friendly fraud are being repeated by the same customer, merchants, and financial institutions will need to take further action to ensure the customer understands their behavior isn’t allowed—and potentially prosecute the individual if the behavior persists.

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Organizations need to do all they can to identify instances of friendly fraud, especially when the individual is repeating the process for further gain. That’s why it’s important to have transaction monitoring systems in place: to know what constitutes “regular” buying activity for a customer to be able to flag any of their activity that seems out of the ordinary.

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Employ a chargeback guarantee program

A chargeback guarantee program is a feature offered by some merchant service providers. Basically, for an extra fee, a merchant can offload fraudulent chargeback detection and liability to a third party. Full programs can be better for smaller companies with less robust risk management systems. On the other hand, micro-fee programs may be better suited for companies with dedicated risk teams and only need certain transactions checked.

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Detect and Defend Against Friendly Fraud with Unit21 

Most friendly fraud can be avoided by improving information and communication flows between merchants, customers, and financial institutions. But repeat offenders won’t pay attention to these details; they’re just looking for an easy way to make quick money, regardless of who gets harmed in the process.

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Stopping them requires knowing what their transaction patterns look like in order to flag activity that may be indicative of fraud. Unit21’s Transaction Monitoring and Case Management tools aid in doing just those things: gathering contextual information and analyzing activity patterns to respond to potential fraud faster.

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To see how they work together, contact us for a demo.

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