What is Friendly Fraud? What to Know About Chargeback Fraud (2024) - Shopify (2024)

When you first opened your business, you probably didn’t anticipate needing to learn about friendly fraud, also known as chargeback fraud.

Unfortunately, navigating the chargeback process is expected for today’s ecommerce business owners—and the volume of chargebacks only increases as your business scales.

In 2022, friendly fraud affected 34% of surveyed respondents alone. According to recent estimates, losses to online payment fraud were projected to surpass $48 billion dollars in 2023.

Friendly fraud is time consuming to contend with and financially draining. But it doesn’t have to be a problem you accept. This article shares how to identify friendly fraud so you can prevent it and protect your online store from fraudsters.

What is friendly fraud?

Friendly fraud happens when a customer makes a purchase and later requests a chargeback from their bank. In friendly fraud scenarios, the customer claims that they didn’t receive the product, or that they did not authorize the transaction, and therefore say they’re entitled to a full refund.

How friendly fraud affects businesses

Friendly fraud is a major issue for businesses because you’ll need to contend with:

• Lost inventory: Unlike a return, you won’t get the product back when a customer initiates a friendly fraud claim. You’ll lose the revenue you earned from the transaction and lose the opportunity to resell the item. Friendly fraud is often referred to as cyber shoplifting for this reason.
• Time spent dealing with customer disputes: To dispute a claim, you’ll need to submit supporting evidence about the customer’s order and an explanation of why it’s fraudulent. Gathering this evidence draws time away from important parts of running a business.
• Additional fees and administrative costs: If you’re unsuccessful at disputing a fraudulent chargeback claim, or the issuing bank sides with the customer, you’ll have to pay the bank chargeback fees. You’ll also lose the entire order total if the bank approves the customer’s requests, hence why the average retailer spends $35 disputing every $100 in chargeback claims.

Why is friendly fraud growing?

Cybersource’s recent Global Fraud Report found that over a third of businesses have experienced friendly fraud. Unfortunately, this figure is on the rise. Some 62% of businesses reported an increase in friendly fraud over the last two years, with most estimating that one-fifth of fraudulent disputes should be attributed to friendly fraud.

Inflation could be a driving factor behind the increase in friendly fraud. People of all ages are concerned that they won’t be able to afford daily living expenses, and 56% of US households are altering their spending habits to counteract inflation.

To some, friendly fraud can become an option if they’ve purchased an item they can no longer afford or see the value of.

Types of friendly fraud

Not all chargebacks come from scammers with malicious intent—sometimes customers make an honest mistake. Some of the most common causes of friendly fraud include:

• Accidental friendly fraud: Sometimes legitimate customers initiate a chargeback if they’ve forgotten about a purchase they’ve made. The mistake is genuine; they don’t recognize a legitimate transaction and mistake it for fraud.
• Chargeback fraud: Friendly fraud becomes more serious when a customer is filing a credit card chargeback claim for an item they know they’ve purchased but no longer want. If someone purchases a gaming console, for example, they could have second thoughts about the price (or push their luck at getting it for free) through chargeback fraud.
• Refund abuse: This happens when a customer requests a refund for a product without actually sending the item back. Amazon, for example, has a returnless refund policy that allows customers to get a full refund for some items without returning them. Some people take advantage of this generosity by requesting refunds for items that they still intend to use, which are in full working condition.

How to prevent friendly fraud

1. Provide clear return policies
2. Write clear product documentation
3. Use order tracking software
4. Customize your billing descriptor
5. Provide excellent customer service
6. Verify customer information before accepting orders
7. Block serial friendly fraud offenders
8. Use chargeback protection

1. Provide clear return policies

Customers might dispute a charge if they’re unsure of their return options. For some, requesting a chargeback from their bank is the only option, particularly if they mistakenly think that the returns window has closed and there is no other way to get their money back for an unwanted legitimate purchase.

A simple way to solve this problem is through clear return policies. Include what’s eligible for a return, how to submit one, and the window customers have to initiate a return. Make this information easily accessible by referencing it across every touchpoint a customer has, including:

• Website announcement bars
• Product or service pages
• FAQ pages
• Checkout pages
• Order confirmation emails

2. Write clear product documentation

Product descriptions tell people exactly what to expect when they’re buying something through your ecommerce site. This can help to combat friendly fraud because people can make more informed shopping decisions, minimizing the risk of them submitting fraudulent chargeback requests for items they no longer see the value of.

Clear documentation, such as terms of service, the payment method they’ve used, product warranties, and online descriptions, can also act as evidence when disputing a claim. This paper trail supports the fact that customers knew what they were buying (and did so willingly).

For chargebacks on Shopify Payments, we automatically submit evidence about the order to the cardholder's bank. If you have additional information you'd like to include, you can add evidence to the chargeback response.

3. Use order tracking software

Order tracking software tells a customer exactly where their order is as soon as it leaves your fulfillment center. It’s useful in case of a dispute from a customer claiming that their goods didn’t arrive. And if there are any delays or issues with the shipment, the tracking software can alert both your business and the customer, allowing you to address the problem proactively before it leads to a friendly fraud dispute.

With Shopify Shipping you can select certain carriers that offer proof of delivery. If the delivery driver snaps a photo of the product in a customer’s open doorway, it reduces the likelihood that customers claim their item was not received. .

4. Customize your billing descriptor

Once a customer completes their purchase, their bank statement will list the purchase amount and billing descriptor. Some ecommerce platforms set the descriptor to their own name by default, however as best practice you can customize the descriptor to the name of your business to help customers recognize the charge and curb disputes.

5. Provide excellent customer service

Providing strong customer service can build trust between your business and customers, while helping reduce the time you spend dealing with fraudulent chargebacks.

Customers who feel connected to your business may be more likely to contact support to request a refund, rather than file a chargeback. And according to Salesforce Research, 89% of people are more likely to make repeat purchases with companies that offer excellent customer support.

Simple ways to improve your customer support include:

• Using a customer relationship management (CRM) tool to collate data and fully understand a customer before dealing with their support ticket.
• Practicing your active listening skills, particularly in cases where customers are unhappy and at risk of filing a chargeback claim if their issue goes unresolved.
• Being proactive and personal, like checking in post-purchase to see if someone needs help with the product they’ve bought.

6. Verify customer information before accepting orders

One way to deal with friendly fraud is to reduce the odds of it happening.

Shopify’s fraud analysis, for example, uses sophisticated machine-learning algorithms trained on millions of everyday Shopify transactions to identify potentially fraudulent transactions. Each order on your store is analyzed and categorized as low, medium, or high risk based on fraud indicators like:

• How many payment attempts the customer made
• Whether the CVV for the credit card is correct
• Whether the billing address and cardholder’s registered address match
• If the IP address is associated with a high-risk connection
• How far the shipping location is from the IP address

Medium- and high-risk transactions are flagged for your review on the orders page, and based on the indicators, you can decide to cancel or fulfill the order.

7. Block serial friendly fraud offenders

Some friendly fraudsters are bad actors who will make multiple attempts to claw money back whenever they make a purchase. Shopify Flow allows you to create automated workflows to manage your fraud operations. You can set up rules to control which orders your store accepts, like automatically blocking orders from known fraudsters. These orders will automatically be canceled before there’s a chance to initiate a chargeback.

8. Use chargeback protection

Unfortunately, it’s not always possible to fight friendly fraud. You can’t stop a customer who is already set on filing a fraudulent chargeback claim. That’s where chargeback protection comes into play.

Chargeback protection helps businesses manage disputes by covering the cost of a fraudulent chargeback. If you experience a fraudulent chargeback on an eligible Shop Pay order in the US, Shopify will cover the cost by reimbursing you the disputed funds and chargeback fee.

How to respond to friendly fraud

Responding to friendly fraud can feel frustrating, especially as the volume of chargeback claims grows with your business. If you find yourself disputing a claim, here’s what you can do.

• Gather evidence: The first thing a bank will ask for when investigating a chargeback claim is to ask the business to submit evidence that the transaction was genuine. Share any communication you had with the customer (such as questions they had with your support team beforehand) alongside store policies and order confirmation details.
• Contact the customer: Not all chargeback disputes have to be resolved through the customer’s bank. You could reach out to the customer directly and ask why they’re requesting a chargeback, which gives you an opportunity to resolve any issues.
• Educate your team: As your business grows, it’s unlikely that you’ll be the only person handling the chargeback dispute process. Train your employees on how to spot a high-risk order and what evidence they’ll need to overturn a claim.
• Revise your fraud prevention strategies: It’s possible for your business to be targeted by professional scammers that request chargebacks to get free goods. Monitor your chargebacks and adjust your strategy accordingly, like bolstering your returns policy for refund abusers or taking legal action against serial offenders.

Use Shopify Protect to prevent friendly fraud

Fraud is a challenging part of running an online business, and sadly, the threat isn’t going anywhere. As technology is constantly evolving and scammers find more ways to target online businesses, you need a strong chargeback prevention strategy to insulate your business.

Shopify Protect makes fraud prevention one less thing to worry about. With fraud detection algorithms that flag high-risk orders and chargeback protection that manages the dispute process for a fraudulent transaction, enable Shopify Protect today to keep your business safe.