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How Friendly Fraud Impacts Business Owners

Friendly fraud, or chargeback fraud, happens for different reasons, including cyber shoplifting, delay in refunding, family fraud, return confusion, unrecognized subscriptions, and buyer remorse. Friendly fraud can be accidental or intentional.

Deliberate friendly fraud happens when a customer makes a legitimate purchase using their debit or credit card but then, for no legitimate reason, disputes the charge and asks the bank for a chargeback.

Accidental friendly fraud chargebacks usually happen when the cardholder:

  • Forgets a recurring payment or purchase
  • Can’t differentiate between refunds and chargebacks
  • Requests a refund from a merchant, but it takes longer
  • Can’t note the merchant’s billing descriptor

With intentional friendly fraud chargebacks, cyber shoplifting is the main issue, with the cardholder intentionally purchasing a product, keeping it, and then filing a chargeback.

4 ways friendly fraud affects business owners and entrepreneurs

According to recent chargeback stats, friendly fraud has significantly increased to 75% since 2021. It is the primary source of chargeback fraud affecting business owners and their businesses. For every $1 chargeback, business owners lose an average of $3.75.

This blog focuses on four ways friendly fraud affects business owners, and a few key ideas businesses can use to minimize the effects of friendly fraud on their businesses.

Friendly fraud and other cybercrimes affect businesses and their owners in the following definite ways:

1. Friendly fraud chargebacks fees are high enough to eat into profits

According to an infographic from Chargebacks911, acquiring banks can charge business owners $20-$100 per chargeback.

Furthermore, credit card processing for businesses is between 1-4%. These high chargeback fees can stretch already-thin profit margins.

As you can imagine, too many chargebacks can cost you business trust because card networks and merchant service providers consider businesses with too many chargebacks as high-risk, thus instituting high processing fees.

Additionally, as a business owner, friendly fraud costs you money, with data showing that businesses lose $3 or more in revenue for every $1 in the original transaction value.

2. Loss of goods/services and revenue

Usually, when a customer makes a friendly fraud chargeback, they have received the product in question.

Unfortunately, because chargebacks are generally out of the business owner’s hands, business owners rarely get back the disputed product or the fees levied by the acquiring bank.

Beyond the chargeback fees, business owners also lose sales revenue. These losses can be incredibly considerable for businesses that sell high-ticket electronics and furniture and those with slim profit margins.

3. It wastes time

Consumers who make intentional friendly fraud chargebacks often deliberately bypass the refund policies a business may have in place and instead go directly to the bank for a chargeback.

The process of disputing chargebacks wastes a lot of time and money. For example, disputing a chargeback claim can take as many as 45 days for the business owner.

This process can also be tedious, especially when it involves court disputes, lawyers, and illegitimate claims, with the consumer and acquiring bank having the upper hand because, even if you win the dispute, your business will still pay other costs

4. It can be demotivating

Most business owners know that their businesses stand the best chance of success when they create better relationships with their target audience.

Instances of friendly fraud disputes that take too long to settle, and that turn the customer’s way, even when there was sufficient proof of the original charge, can demotivate an otherwise passionate and dedicated business owner.

Such occurrences can make the business owner jaded and distrustful of the customer-business owner relationship. Jaded business owners may adopt avoidance measures like closing down an eCommerce site, only accepting cash payments, and other actions that hinder business growth.

As you can see, friendly fraud impacts business owners and their businesses in many ways and is costly. 

Tips for preventing friendly fraud 

Fortunately, business owners can do something to prevent or minimize friendly fraud. For example:

  • Tracking repeat offenders: Alone, tracking offenders can help business owners know which subset of their customers makes the most friendly fraud claims, which can be instrumental in stopping friendly fraud in the first place.
  • Have clearly outlined refund and shipping policies to avoid future problems.
  • Use authorization holds to reverse charges without incurring chargeback ramifications.
  • Institute signature delivery systems leave little room for friendly fraud—such a system clearly shows that the consumer has received the product, which can reduce cases of friendly fraud instances related to product delivery.
  • Provide excellent customer service by providing several communication services and avenues customers can use to get in touch with the business. Additionally, the sales department should respond quickly to correct customer-reported card charges issues. 
  • Maintaining good customer relations is also one of the best and simplest ways to prevent and minimize friendly fraud and its effect on business.

Other ways to reduce chargebacks include prioritizing cybersecurity, keeping updated points of sales systems, and managing customer expectations.

As you can see, friendly fraud impacts business owners and their businesses in many ways and is costly. Fortunately, as a business owner, you can do something and implement systems that help you prevent and minimize friendly fraud.

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