It is estimated that as much as 86% of all credit card fraud actually falls into the category of “friendly fraud.”

Of course we know that there is nothing friendly about fraud, especially when you are running a business. What is friendly fraud, and what can you do to protect against it?

Friendly fraud, also known as “chargeback fraud,” occurs when a consumer makes an online shopping purchase with their own credit card, and then requests a chargeback from the issuing bank after receiving the purchased goods or services.

The risks of friendly fraud occurring increases by 300% when you are selling goods and services internationally! And for every $1 of purchased goods or services subject to the chargeback process, it may actually cost you as the merchant $3 to resolve. It is an expense that all of us as business owners should attempt to minimize.

So how do you protect against an online purchaser using their own credit card to buy your goods or services, and then later going directly to their bank to dispute the charge to claim that they didn’t receive the goods or services, that the goods or services didn’t match the description, that they don’t recognize the charge, or that they weren’t the one that transacted the purchase (i.e. someone else wrongfully used their card)?

Here are TEN steps to follow to increase your protections and the odds that when something like this happens, the bank or credit card company will make a determination in YOUR favor:

1. Collect emails at the point of purchase, and send email confirmations to the buyers following the purchase. (To make sure they really did transact the purchase).
2. Require e-signatures. Require an actual signature electronically confirming that they purchased/ make the order.
3. Always require the CVV – the custom verification value – to confirm that the card is IN HAND by the buyer at the point of purchase.
4. Use a Payer Authentication Service such as 3D Secure. E-commerce does not benefit from the advantage of the modern chip reader (which is supposed to provide greater security).
5. Use an Address Verification Service. Check with your payment processor to make sure you have an address form built into your online checkout process so that you are collecting a physical/billing address along with their payment information.
6. Also, in conjunction with collecting the buyer’s physical mailing address, record their IP address at the point of purchase. (Again, you might have to check with your payment processor to add this to your checkout process). But it becomes increasingly difficult for a buyer to claim friendly fraud if they have entered both their physical mailing/billing address and their IP address has been captured, and those two things match.
7. If you are delivering physical products in the mail, require signature at delivery or proof of delivery. Don’t just use standard mailing options. When signatures are required at delivery, or proof of delivery is tracked, you have the delivery and address tracked and recorded electronically and are less likely to be subject to chargeback requests.
8. Because a certain number of buyers will have valid issues that need support following a purchase, make contacting you or your customer service team easy. Make sure that your contact info is readily available on your website and again in the confirmation email sent to your buyer. For buyers that have valid issues, if it is too difficult to get customer service support with their order issues, they may just request a chargeback instead. Make it easy for your buyers to get the help they need.
9. Ensure that the Merchant Descriptor – i.e. the description that shows up on your buyers’ credit card statements identifies your business. And in the confirmation email, remind them what will show up on their credit card. Some chargebacks happen simply because people forget about and then don’t recognize the charge. Or perhaps a couple both use the same card, and the primary card holder doesn’t recognize, and can’t decipher the charge and then proceeds to request a chargeback.
10. Last, but not least, make sure that your Terms of Purchase are properly drafted and conspicuously posted – available at or immediately prior to the point of purchase so that your clients and customers are aware of your return policy, and any other terms that apply to their purchase (guarantees, disclaimers, timing/access to digital products or programs, etc).

As a final reminder, check with your payment processor on all of the above protections (or any others they offer), and become familiar with your checkout system. If you close any gaps that currently exist in your check0ut process, and follow the steps above, you will greatly reduce the risk that friendly fraud claims pose to your business.

What happens if you do all of the above, and a chargeback is still initiated? First, remember that if a chargeback has been initiated, and is “in the system,” you have to, as the business owner, file a response or rebuttal.

Many business owners instead reach out to the buyer or customer directly, and the customer will reassure them (once they recognize or have clarification about the charge), that they will call their bank and “cancel” the chargeback. You cannot rely on your customer to do this, and it usually is not sufficient for canceling the chargeback. Most issuing banks will side with their customers and cardholders and issue the chargeback, especially without a response from the merchant. So, if a chargeback has been initiated, you have to respond with your rebuttal information (all of your supporting documentation), and go through the process on the timeline required by the bank or credit card company (usually 45 days to respond).

The bank or credit card company will then review the information received with their customer. At that point, most scenarios will be clarified and a determination will be made. However, if it is an issue of quality or requires digging in to additional or technical details, some chargeback scenarios will require a secondary process whereby the parties are required to go to arbitration for a decision regarding the matter.

If, as a business, you end up with a high number of chargebacks on your account, you may be subject to penalties assessed by your merchant account in the way of higher fees and other rates (or the loss of your account). Your ability to accept credit cards could be suspended or you may be required to maintain a reserve to continue processing orders.

The bottom line is that a clean processing history benefits your future business by way of decreased costs and increased access to services including higher processing limits. 

Friendly fraud is on the rise. But it can be minimized! Here’s to buckling up in business! I hope this information helps you to protect your business income, your customer relationships, and the future of your business.

PS. If you need Terms of Purchase prepared for any online offerings, programs or services, get in touch! (I build these documents and many others to help protect online businesses.)

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Here are my last three posts in case you missed them!

Real Money Talks :: Podcast Interview by Loral Langemeier on the Importance of Business Contracts

Become a Website Warrior™ with The Website Protection Package™

Conflicting Business, Tax or Strategic Advice :: What to do? 

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