What Entrepreneurs Should Know About ‘Friendly’ Fraud

If you run a small business, you know how hard it is to keep up with your customers’ needs, especially when dealing with chargebacks. Despite your best efforts, customers can dispute a legitimately authorized transaction in less time than it took to complete the original purchase. This can create additional work for you and jeopardize the health and reputation of your business – all while the customer is committing “friendly fraud” along the way.

Friendly fraud, also known as first-party misuse, occurs when customers abuse the chargeback system by disputing legitimate purchases they made, claiming they were unauthorized or fraudulent. This practice creates challenges for merchants who must balance protecting themselves against false claims with maintaining customer satisfaction.

So why does this happen? Customers often forget about recurring subscriptions and online purchases they’ve made. Sometimes, they simply don’t like what they received or want their money back without having to return the product.

According to a study, nearly one in five consumers who have filed a chargeback dispute have knowingly submitted a false fraud claim on legitimate purchases. Unfortunately, there are many more contributing factors that require businesses to constantly be on the defense against meritless chargebacks and first-party fraud.

Chargebacks are meant to protect customers from fraudulent and unauthorized charges, but some customers abuse consumer protection to get free products or services. This is unfair to you and your customers, who will pay higher prices to counter your losses. Whatever the reason, customers should always attempt to reach out to the business before filing a chargeback request.

First-party misuse continues to be a growing problem that can harm your business and have a detrimental impact on your bottom line. In fact, a 2024 report found merchants considered first-party misuse the second-most common type of fraud impacting their business.

Consumers don’t realize that for many small businesses, the impact of friendly fraud can mean the difference between success and failure – from hindering a business’s ability to invest in new products to meet its most important financial commitments such as rent, utilities or payroll.

Luckily, there are steps you can take to help prevent friendly fraud:

Ensure that product descriptions and refund or exchange policies are clear, and avoid using confusing language. Make all official policies easily accessible and confirm that customers are informed of any special considerations at the time of purchase.

Provide customers with detailed receipts or invoices that clearly identify your business name and include any relevant policies or terms and conditions.

Make it easy for your customers to share feedback and reach out to you first if they encounter any problems. Provide customers with convenient ways to contact you, such as email, chat, phone, or social media.

Aim to address customer concerns within 24-48 hours, if not sooner. Being timely and responsive will help you resolve issues before they escalate into a chargeback situation.

It’s easy to get caught up in the excitement of seeing your sales numbers each morning. However, do your due diligence and monitor for unusual or suspicious activities, such as multiple orders from the same IP or shipping address and incomplete or mismatched customer information.

For card-not-present transactions, incorporate payment verification tools such as CVV (Card Verification Value), AVS (Address Verification Service), 3D Secure, or biometric authentication to confirm the customer’s identity. It’s also a good idea to require signatures or confirmation of delivery to verify a customer has received the product or service.

One of the most important components of an effective dispute response strategy is providing timely and detailed responses. Keep track of deadlines, don’t wait until the last minute, and pay attention to every detail—especially if you are asked to provide additional documentation.

Although you might feel alone in this fight, according to a recent report, losses from friendly fraud total over $25 billion a year. It’s important to note that no business is immune to these effects, and every indication is that this number will continue to rise.

In response to the ever-increasing challenges that businesses face, payment networks have introduced helpful frameworks that better equip merchants to combat friendly fraud.

At the end of the day, friendly fraud is a growing concern that is shared among businesses of all sizes, as it is both complex and costly. By understanding the issue, taking preventive measures, and knowing how to respond, you can protect your business from unjustified disputes while safeguarding your reputation and hard-earned revenue.

This article originally appeared on Score.