Credit Card Friendly Fraud: A Merchant's Guide
A customer buys, gets the goods, then calls the bank and says the charge is fake. Here is what friendly fraud is, why it happens, and how to stop it.
A sale goes through. The goods ship. The customer signs for the box. Then the bank calls you, not the customer. The cardholder has told their issuer the charge is one they never made. That is credit card friendly fraud, and this page is about what a merchant can do about it.
What friendly fraud is
Ethoca describes friendly fraud as fraud committed when a person knew about or benefited from a transaction they wrongly reported as unauthorized. In plain words, the customer knew, or got something out of it, and still called it a fake charge.
It is not one thing. Ethoca says friendly fraud ranges from benign cases where a consumer disputed a transaction by mistake to hostile cases of abusing the chargeback process. On one end sits a shopper who forgot a purchase. On the other sits someone who works the system on purpose. A friendly fraud chargeback can land anywhere on that line.
It is also not the same as a true fraud chargeback, where a stolen card was used and the real owner never knew. A fraudulent chargeback filed by a cardholder who did buy the goods is the friendly kind.
Why cardholders file these disputes
The reasons run from innocent to sharp.
One reason is simple. The customer does not recognize the charge. The name printed on the customer's bank statement may be different from the one on your door. An unclear or confusing merchant name can make a cardholder believe a real charge is fraud.
Subscriptions trip people up too. A free trial rolls into a paid plan. A year goes by. The monthly charge shows up and the cardholder has no memory of agreeing to it. Recurring charges are especially likely to draw disputes, so train sales and customer service staff to handle them.
Family spending causes its share. A child buys a game on a parent's card. The parent sees the charge and assumes theft. A merchant can offer evidence that a member of the cardholder's household or family made the purchase.
Then there is buyer's remorse. The customer regrets the purchase, finds the return window closed, and calls the bank instead. Chargebacks911 says friendly fraud follows surges of increased spending.
Stop the problem before the sale
Many disputes come from avoidable mistakes in how a merchant processes a sale. Fix those first.
Make your charges easy to spot. Cardholders must be able to recognize your charges when they look at their bank statements. Check that your acquirer has the right business name, city and state for your account. You can check your name by buying something at each of your outlets and reading your own card statement.
Be straight about what you are selling. Check that how you describe your products, in ads, online, on receipts and in phone scripts, is accurate and not misleading.
Show your rules up front. Clearly sharing your return, refund and cancellation policies can help you avoid misunderstandings and disputes. Visa's guidelines say that for in person and online sales, the cardholder must see your policy at the time of purchase. Visa's guidelines say your website must show its refund policy before final checkout, with a click to accept button or checkbox. Visa's guidelines say that for phone orders, you must be able to prove the cardholder received and acknowledged your policy. Visa's guidelines say that if your store takes no returns, the words no returns must be on all copies of the receipt.
Guard the sale itself
For online and phone sales, always get an authorization, whatever the amount. Then use the tools built for card-absent sales. For online and phone sales, use tools like Visa Secure, CVV2 and the Address Verification Service to help reduce fraud. Visa says merchants that use Visa Secure are protected from certain fraud disputes, as long as the sale is processed correctly. Credit card address verification is one part of that set.
Hold the money until the goods move. For online and phone sales, do not deposit the sale until you have shipped the goods. A customer who sees a charge before the goods arrive may contact their card issuer to dispute it.
Guard the time after the sale
If an order will be late, tell the customer in writing and let them cancel if they choose.
Get proof the goods arrived. Proof of delivery or pickup lets you answer a dispute where the customer says the goods never came.
Handle cancellations fast. When a customer cancels a recurring charge, cancel it right away or as the customer asks. Tell the customer in writing that their subscription is cancelled and when the cancellation takes effect.
And never send an unhappy customer to the manufacturer instead of trying to fix the problem yourself. If a customer with a valid complaint contacts you, act promptly and issue a credit as appropriate.
Fight the dispute with evidence
A friendly fraud dispute can arrive as a card-absent fraud claim. A card-absent fraud dispute is one where the cardholder claims they never approved or joined in an online, mail or phone sale.
On Visa, your answer is compelling evidence. Compelling evidence is proof that the cardholder took part in the sale, received the goods or benefited from the sale.
Know its limits before you lean on it. Compelling evidence does not force the issuer to decide that the cardholder took part in the sale. You can make the best case in the world and still lose. Build it anyway.
What counts? Photos or emails showing that the cardholder has or uses the goods can serve as evidence. Earlier payments for the same goods or service that were never disputed can serve as evidence. Evidence that the same device and card were used in an earlier sale that was not disputed can support a merchant. A merchant can answer a card-absent fraud dispute with earlier undisputed purchases that share data like device ID or IP address.
For a subscription, a merchant can show a binding contract, that the cardholder uses the service, and an earlier undisputed payment.
Compelling Evidence 3.0
Visa has a newer path for some of these claims. Under Compelling Evidence 3.0, the acquirer can resolve the dispute instead of submitting evidence the cardholder could challenge again.
It has edges. Compelling Evidence 3.0 covers only card-absent sales in which the cardholder claims they did not authorize or take part. It works for recurring transactions. It does not work for a first time buyer, because there is no purchase history to compare. Merchants that fall short of the remedy criteria can still turn to the other kinds of compelling evidence.
One more thing from Visa. When a merchant passes the required data through Verifi Order Insight ahead of the dispute, the dispute is turned away. Passing order details to the issuer in advance can head the claim off.
Find the root cause
Each dispute carries a lesson about your business. Sort your disputes by type, because every type signals a different business problem and its own fix. A string of claims about late delivery is a signal to look at your shipping. A run about unrecognized names points at your statement descriptor.
Then bring in your bank. Work with your acquirer on a plan that finds the root cause of your disputes and how to fix it.
The customer who forgot, the child who spent, and the shopper with regrets all leave tracks. Your job is to make the charge easy to recognize, the sale easy to prove, and the record easy to find when the bank calls.