There is Nothing Friendly about “Friendly Fraud”

Friendly fraud

In 2012, e-Commerce merchants lost more than $11 billion worldwide through debit and credit card fraud. Think about that for a moment… $11+ billion! That’s a lot of money. Among the fraud committed, “friendly fraud” is at the top of the list. Although it may sound non-threatening, it is anything but; in fact, there is nothing friendly about this type of fraud, which is also referred to as “chargeback fraud”.

What is “Friendly Fraud”?

Most of the time, friendly fraud occurs during Card-Not-Present (CNP) transactions, such as online purchases. To break it down, consider this scenario: a customer visits your web store to buy a brand new tablet. They find what they are looking for, follow the steps to pay for their tablet by credit card (either directly through the merchant or through a third-party payment processor), and leave the store happily with their purchase which will arrive on their door step in the next week or so. But when the customer receives their goods, they have a change of heart… about the money they paid. He decides that he deserves this tablet free of charge because why not? He calls his credit card company and files a complaint stating that he was charged for a tablet he never bought or received, and says he has fallen victim to fraud. The credit card company sides with him, as they usually do, and refunds him his money. This customer got his tablet without having to pay for it, leaving the merchant with a bigger loss than just the price of the tablet.

As you can tell from the above scenario, friendly fraud is committed by the customer after they have “paid” for the product. Merchants can dispute, but this does not change the fact that every time a customer does a chargeback, it hits their merchant account hard, raising fees because of the increased fraud risk in their customer base. Furthermore, getting involved in a dispute is draining and labour-intensive, with little return for the merchant.

Who is affected by chargebacks?

The people committing this form of fraud might not realise who they are affecting when they call their credit card provider for a deliberate chargeback. Yes, the merchant is negatively affected, losing money and products, but there are other casualties. Every time a customer commits friendly fraud, the seller’s merchant account becomes riskier, incurring a higher operation cost. This translates into higher fees and more money spent on fraud prevention measures; according to a study conducted by Payments Journal in 2012, retailers spend about $6.47 billion annually on fraud prevention measures. Because of these higher operation costs, the price of the products and services for sale in the seller’s web store increase. This affects other customers – regular people just trying to buy something they want or need for themselves or someone else.

Trustev, an e-commerce anti-fraud company, found that of the 5.1% of people who reported that they have committed friendly fraud, 20% stated that it “didn’t really bother them”. This is upsetting not only because of the fraudsters’ destructive sense of entitlement and lack of empathy, but also because they can often be stealing money from small to medium-sized businesses and from fellow customers rather than from big faceless corporations.

What can you do to combat friendly fraud?

Although it might prove impossible to fully prevent chargeback fraud, you can still take measures to decrease its potential for damage.

Leave a paper trail

In the event that a customer commits friendly fraud, whether deliberately or not, you will have an easier time disputing the chargeback if you can prove that the transaction was authentic. This includes having a record of the transaction with shipping tracking (if your product is not electronic).

Use fraud prevention software

A good software program that matches billing and shipping IP addresses can help you argue your case if you ever have to dispute a chargeback with your banking or payment processing partners. You can also use software that detects the use of hidden proxies (used when customers are trying to hide their IP address for the purposes of fraud and other criminal activity).

Require a card security code upon credit card purchase

A card security code (CSC), also called a card verification value (CVV or CV2) or card verification code (CVC), is a code that the customer enters to authenticate and authorise the transaction. Requiring this as part of the checkout process could not only prevent fraud of various kinds, but also provide you with proof that the customer most probably willingly made the purchase.

Makes returns and refunds easy

Not all friendly fraud is intentional. Some people are just not satisfied with the product. Some folks may have forgotten about the purchase. If you have a dispute resolution process in place, make sure it is efficient and timely so that the customer feels confident in your ability to resolve the situation.

Friendly fraud may exist, but it doesn’t have to be one of your problems. Taking the time to learn about it, how it can affect your business and how to prevent or manage it is a proactive solution that could save you a lot of headaches in the future. For more tips on securing your e-commerce business, subscribe to the DalPay Blog and follow us on Facebook and Twitter.

The Ultimate Omnichannel for your Online Business


In these exciting days of technological proliferation, many businesses have taken the multiple retail channel route: they have integrated online sales into their brick-and-mortar operations. Online retail channels include regular online sales through desktop- or laptop-optimised websites, as well as mobile sales and mobile app sales. A prime example of a brick-and-mortar store that has embraced omnichannel retail is IKEA. Not only does IKEA have 351 physical stores in 46 countries (as of December 2014), but they have a website, a mobile site, and a mobile app through which customers can browse, purchase and return items. Undoubtedly, turning omnichannel has broadened their already global reach, making shopping a convenient and pleasant experience for all, regardless of their preferred mode of shopping.

But what about businesses that have a rich online presence but do not have a physical store? Are there any benefits of opening a store? Can it boost profits? These are questions worth considering if you operate an online business, and are flirting with the idea of going brick-and-mortar.

The Benefits of Opening a Brick-and-Mortar Store

Even though industry analysts question the effectiveness of high street retail to boost company profits (due to the tendency towards the online omnichannel approach), there is still plenty of merit in opening up a physical store. According to a Tech Crunch survey, 78% of consumers still prefer to shop in-store, and claim to spend 6 times more in-store than online. This is definitely saying something!

Here are a few more reasons why you should consider opening up a physical store:

Multi-sensory experiences

People like to see and hold what they are considering purchasing. Some people like the smell of books, and prefer to leisurely browse the aisles of a book store and take their time rather than searching online. Maybe they don’t know which book they want, and want to see what jumps out at them – this is way harder to do online. Also, it goes without saying that when shopping for clothes, most people like to try on an outfit to make sure it fits and looks good before spending their money.

Under this umbrella is the growing trend of innovative and interactive technology. Canada’s Unique Solutions Design Ltd. has created the Me-Ality body-scanning stations, which are popping up in retail clothing outlets in Canada and the US. Customers who are constantly frustrated by the lack of consistent sizing across different stores can have their body scanned, and receive a unique barcode containing their measurements and a customised shopping guide. It is just a matter of time before these start appearing in stores and malls around the world. Again, this is something you will not be able to find online… yet.

Social interaction, relationship-building and personalised customer service

Humans are social creatures, and we like to interact with other people and build relationships. Although it is not impossible to build strong and lasting brand relationships with customers if you only have an online retail business (such as Etsy), nothing compares to seeing a smiling face of an employee when you are a customer. Going into a store and being greeted and waited on by an actual human can be a positive experience that can determine whether you will transition from one-time customer to returning customer.

Furthermore, a brand can provide immediate and personalised customer service in-store. Online businesses can provide terrific customer support, but again, nothing beats the immediacy of service in a physical store.

Improved logistics and lower shipping/storage costs

Some merchants are opening physical stores that are also being operated as warehouses and shipping centres for their products. One of the biggest online stores, Amazon, is doing just that. They will be located in New York City, in the same neighbourhood as Macy’s, across from the Empire State Building, and will be using their new physical store as a mini-warehouse with a small inventory for same day shipping within the city. This store will also make returns and pick-ups so much easier for local Amazon shoppers in and around the Big Apple. Other online businesses can expect some or all of the same benefits by opening up brick-and-mortar stores. Rather than returning a product via the post office, customers can go right to the physical location of their favourite webstore, and return or exchange a product easily and without the long waits.

Something to Keep in Mind

Although the thought of opening a physical store for all of the aforementioned benefits sounds exciting, you still have to keep in mind that although you may be able to increase your market share by reaching a broader customer base through the omnichannel approach, your profits can decrease due to promotional expenditures and operational and administrative costs associated with a physical store. However, with more intensive distribution of your products thanks to opening a new channel, you might see the opposite happening. If you are willing to take the risk, you may some glorious returns.

For more ways to optimise your online business and elevate your customers’ experiences with your brand, subscribe to the DalPay blog. For news and updates from around the industry, follow us on Facebook, Twitter and LinkedIn.