The opportunities have never been greater, and the challenges more challenging, for America’s small businesses.
And with the news that small and-medium-sized businesses (SMBs) could be facing up to a 40% jump in “friendly fraud” and “first-party fraud” — meaning card chargebacks and disputes by shoppers — striking a balance between meeting shopper demands for a frictionless purchasing journey and doing what is possible to prevent losses from friendly fraud is increasingly top of mind for Main Street SMBs and their payments partners.
Friendly fraud, unlike its more malicious counterpart — actual fraud — often involves genuine customers who, for various reasons, dispute charges they’ve legitimately made. Still, the rise of shoppers disputing legitimate transactions poses a substantial financial threat to merchants.
It’s estimated that first-party fraud costs merchants billions of dollars annually, not just in lost sales, but also in chargeback fees, increased transaction costs and potential damage to merchant accounts. Excessive chargebacks can damage a merchant’s reputation with credit card processors, potentially leading to higher processing fees or the loss of the ability to accept credit card payments altogether.
Against this backdrop, SMBs face a dual challenge: preventing friendly fraud while maintaining a smooth, customer-friendly purchasing process. After all, excessive security measures can deter legitimate customers, leading to cart abandonment and lost sales, while a laissez-faire approach can leave SMBs open to abuse and even greater losses.
The goal, as with many successful payments experiences, is to walk a delicate line between minimizing fraud without compromising the end-user experience.
Read more: Most eCommerce Merchants Recognize Innovation’s Potential in Curbing Fraud
The key to combating friendly fraud lies in understanding its nuances, educating customers and continuously refining fraud prevention practices.
Unlike traditional fraud, where stolen card information is used to make unauthorized purchases, friendly fraud involves the cardholder themselves disputing a charge for goods or services they actually received. This can happen for a variety of reasons, including buyer’s remorse, a misunderstanding of the return policy or an attempt to avoid payment for legitimate charges.
Traditionally, shoppers are meant to undertake a good-faith effort to resolve chargeback issues with the business itself before turning to their bank to dispute the charge, but many customers find it easier to skip this step — particularly given the fact many disputes are resolved in the customer’s favor, and depending on their card tier (gold, platinum or starter, etc.) banks may return their money without initiating a chargeback.
Still, providing exceptional customer service can preempt many chargebacks. Customers who can easily resolve issues directly with the merchant are less likely to turn to their bank for a chargeback. Offering multiple channels for customer support, including phone, email and live chat, as well as ensuring that support team members are well-trained and empowered to resolve disputes quickly are all ways to help responsibly and frictionlessly mitigate first-party disputes.
For businesses that rely on subscription models, clarity around recurring payments is essential. Customers should be fully aware of what they’re signing up for and how they can cancel if they choose to do so.
“Chargebacks have long been a thorny issue for merchants,” PYMNTS wrote in March. “And as transactions become increasingly digitized, chargebacks have in turn become more prevalent.”
Read more: Preventive Measures Pay Off as Merchants Fight Surging Chargebacks
Friendly fraud is a significant challenge for merchants, but it doesn’t have to be a losing battle.
“Being able to handle chargebacks preventatively has a huge ROI [return on investment],” Robert Painter, director of chargeback management at Kount, an Equifax company, told PYMNTS. “It means no chargeback, no refund, and no case to go down and chase.”
But according to PYMNTS Intelligence, only one-third of merchants currently utilize mechanisms that detect potential fraud as the cause of failed payments – meaning that many businesses ultimately are failing to recognize the connection between fraud detection and failed payments, resulting in lost sales and missed opportunities for improving payment success rates.
“Friendly fraud can eat into not just a dollar amount but also an operational cost amount to merchants, where if you’re a small business and you’re focusing more time on figuring out how to investigate [friendly fraud], working with your acquirer and your payment facilitator, that is lost time spent away from your business,” Mike Lemberger, senior vice president, regional risk officer for North America at Visa, told PYMNTS.
At the same time, research shows that merchants who engage in greater levels of collaboration with payment service providers (PSPs) are more likely to adopt screening mechanisms that identify potential fraud as the cause of failed payments.
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