In recent years, the e-commerce boom and increased online spending have led to a surge in friendly fraud. It occurs when a cardholder doesn’t recognize a transaction on their bank statement and disputes it as a fraudulent charge.

Disputed charges lead to many issues for businesses. The LexisNexis study found that merchants lose $3.60 for every dollar in original transaction value.

Loss of Goods and Inventory

Friendly fraud can cause business owners to lose inventory or other assets they may have invested in. It can also leave businesses with negative cash flow and prevent them from reinvesting in their company.

For example, if an online retailer sells physical products and ships them to customers, the customer could file a chargeback with their bank, claiming they never received the merchandise. If the cardholder successfully makes this claim, they will receive their money back from the bank without asking the company what went wrong.

While it is not entirely preventable, several tactics and best practices can help businesses reduce their friendly fraud rates. One such tactic is using a digital fraud tool to authenticate transactions and flag suspicious activity for further investigation.

Another is ensuring that billing descriptors match company names and products to make it easier for customers to recognize transactions on their credit card statements. Additionally, businesses should send payment reminder emails to their customers to avoid accidental friendly fraud.

Chargeback Fees

Aside from losing merchandise, merchants face a wide range of chargeback recovery fees. Various reasons, including unrecognized transactions, disputes over the condition of goods or services, and using a different name in transaction data, can cause these costs. Friendly fraud may also be due to a lack of clear communication with the business, or it could be an attempt by the cardholder to dispute a charge simply because they no longer want a product.

Regardless of the reason, these costs add up quickly. Moreover, it takes time and resources for businesses to respond to each of these incidents, which can divert attention from other important business activities.

In addition, if the number of chargebacks exceeds a certain threshold set by the card network or payment processor, a company may even lose its processing capabilities. This is a major headache that can be avoided with proper fraud prevention solutions.

Customer Dissatisfaction

When a shopper disputes a legitimate purchase due to miscommunication or misunderstanding, it can result in a triple whammy of loss: the cost of the disputed product or service, the return and refund costs associated with the dispute, and fees charged by the card payment processor. For small businesses, this can be financially devastating.

Unlike fraud charges, which are usually flagged immediately, the cardholder often reports friendly fraud much later. This is partially due to the increase in e-commerce convenience, which has created a culture of impatience for many consumers.

To minimize friendly fraud, businesses should provide exceptional customer service and clearly outline their return policies. Having authorization holds that can reverse charges without chargeback ramifications and requiring signature delivery systems can also help reduce friendly fraud cases.

Additionally, it is helpful to track repeat offenders to identify patterns and prevent them from shopping with your business. Keeping key records on hand and communicating refund statuses quickly will also speed up the dispute process, making your business more likely to prevail in a friendly fraud chargeback.

Legal Issues

Although accidental friendly fraud doesn’t happen with malicious or criminal intent, the impacts on businesses are similar to those of other fraudulent activity. Businesses are hit with a triple-whammy of loss:

• They lose the cost of the goods/services.
• They are forced to pay chargeback fees.
• The result, their reputation takes a blow.

 These incidents involve customers falsely claiming that their order never arrived, did not work as advertised, or was damaged somehow. The problem is that the fraudsters are often successful at arguing their case with the banks, so a business may find itself battling a chargeback claim months after it was filed.

The best thing e-commerce merchants can do to combat this fraud is to ensure clear and effective communication with their shoppers. They should also invest in a digital fraud prevention tool that keeps granular records of each transaction and uses machine learning to identify suspicious activity.