The Growing Threat of Friendly Fraud

In the rapidly growing world of e-commerce, businesses are constantly on guard against various types of fraud. While they might be prepared to combat fraudsters and hackers, there's another type of fraud that lurks closer to home - friendly fraud.

Often underestimated due to its seemingly harmless name, friendly fraud poses a significant challenge for online retailers, capable of causing substantial financial loss and damaging customer relationships. In this comprehensive analysis, we delve into the rising menace of friendly fraud, its implications for businesses, and the effective strategies that can be employed to prevent it.

The Enigma of Friendly Fraud

Friendly fraud, often innocuously misinterpreted due to its name, is in fact a mounting issue for businesses in the e-commerce space. This type of fraud, also known as chargeback fraud, unfolds when a customer purchases a product or service online using their credit card, successfully receives the item or service, but subsequently disputes the charge with their card issuer. This results in a chargeback. According to a report by LexisNexis, friendly fraud has increased by 41% since 2012, underlining the growing significance of this problem.

Driving Factors Behind Friendly Fraud

Friendly fraud can emerge from various scenarios. In some cases, it's simply a case of honest confusion on the part of the customer who might not recognize a transaction on their statement. This is often due to unclear merchant descriptors. According to a survey by Ethoca, up to 62% of cardholders have contacted their bank because of an unrecognized merchant descriptor. However, there are also instances where consumers knowingly commit friendly fraud, intentionally disputing a valid transaction in an effort to get their purchased product or service for free.

Implications for Businesses

The effects of friendly fraud on businesses are far-reaching. With every chargeback, the merchant loses not only the revenue from the sale but also the product or service, along with being slapped with additional chargeback fees. LexisNexis found that for every dollar of a chargeback, it ends up costing the merchant $2.40 in related costs. An elevated chargeback ratio can also lead to increased transaction fees from payment processors, and in severe cases, can even result in the termination of the merchant account.

Preventative Strategies Against Friendly Fraud

Prevention remains the most effective line of defense against friendly fraud. Businesses can strive for clearer communication regarding what customers are buying and how the charges will appear on their credit card statements. Robust verification processes, such as two-factor authentication, can further deter friendly fraud. Similarly, meticulous record-keeping of all transactions and customer interactions can aid in this battle.

Challenging Instances of Friendly Fraud

If a business encounters friendly fraud, they have the option to contest it by providing evidence to counter the customer's claim. Such evidence can include thorough transaction records, delivery confirmations, or communication history with the customer. However, the process of disputing chargebacks can be resource-intensive, necessitating a well-structured, efficient chargeback management strategy.

Harnessing AI and Machine Learning in the Fight Against Friendly Fraud

AI and Machine Learning are powerful tools for identifying and combating friendly fraud. AI can analyze customer patterns and behaviors, allowing potential cases of friendly fraud to be flagged more quickly. ML algorithms, meanwhile, learn from previous fraud incidents to predict and prevent future ones. CyberSource reported that companies using machine learning for fraud detection reported a 60% reduction in false positives and a 50% reduction in manual review costs.

Over the next 24 months, the impact of friendly fraud on e-commerce businesses is expected to become even more significant. With the ongoing growth of digital commerce driven by changes in consumer behavior and the ongoing effects of the COVID-19 pandemic, the potential for friendly fraud is increasing. As more people turn to online shopping, the number of transactions - and hence, opportunities for chargebacks - is set to rise.

In particular, businesses that fail to adapt and implement preventative measures against friendly fraud could face substantial financial losses. As per a report from Juniper Research, online payment fraud, including chargeback fraud, could cost businesses an astounding $25 billion annually by 2024. These losses stem not only from the value of disputed transactions but also from associated chargeback fees, lost inventory, and operational costs.

Moreover, high chargeback rates can lead to increased processing fees or, in extreme cases, the loss of banking relationships, which can severely hamper a business's operations. Beyond the financial aspect, businesses also risk damage to their reputation. In an age where online reviews and social media feedback can heavily influence buying decisions, unresolved chargebacks can negatively impact customer trust and brand perception.

Therefore, friendly fraud will continue to be a key concern for e-commerce businesses in the next 24 months. It's crucial that businesses proactively address this challenge by implementing robust fraud detection and prevention measures, investing in technology like AI and machine learning to detect unusual activity, and improving customer communication to minimize misunderstandings that can lead to chargebacks.

=============================================================

Lynk offers a unique payment solution that is set to transform the way businesses handle transactions online or offline. Our innovative payment solution provides a cost-effective payment process and cultivates customer loyalty and rewards. With Pay by Bank, businesses can seamlessly collect instant or recurring payments with fee savings of up to 90% while enjoying instant access to capital, lower fees, higher revenue, and a seamless omnichannel experience. To learn more, visit: www.trylynk.com