Navigating friendly fraud a top priority for retailers

Friendly fraud is growing into one of the largest problems for retailers selling through the online channel. To find out more about the phenomenon, we spoke with Venetsia Chaparova, an expert in the field with PaymentGenes.

$25 billion per year. That is approximately how much retailers and ecommerce players lose from friendly fraud in a year, according to the National Retail Federation.

“And it’s not just about the money, but also around the workload that comes with it – from disputing friendly fraud to having to change the books through to chargebacks,” says Venetsia Chaparova, senior consultant at PaymentGenes, an internationally-operating payments consulting firm.

In recent years, friendly fraud – also known as chargeback fraud – has been on the rise. Friendly fraud is when a customer forgets about or does not recognize a transaction they made and charges the money back from the vendor or their bank. This is clearly also sometimes done maliciously.

With the holiday peak in sales behind us, online merchants are now dealing with sorting out the inevitable holiday fraud that often comes with it. Chargebacks can make a serious dent in profit margins and cause strain for e-commerce businesses.

Chargebacks are often written off as part of the cost of doing business and, indeed, many businesses see a solution in increasing sales to counteract it. But fully cutting back on fraud while also increasing sales is not often a realistic solution.

The average e-commerce platform will decline around 2.6% of all orders because of suspecting fraud. That rate increases with higher price orders, reaching 3.1% for orders over $100.

“With merchants selling digital goods, the majority of friendly fraud is caused by people changing their mind overtime,” says Chaparova.

“One reason for this could be a lack of funds over the time period, which leads buyers to claim the digital goods did not meet their expectations due to an inaccurate product description. This type of friendly fraud is also very common after the holiday season, when people realize they might have overspent.”

So while the problem is clear, the solution is not so much so. There are, however, some tools that can help merchants fight against this type of fraud. Some tools stop analyzing at the point of checkout, but others use AI to analyze pre- and post-payment data in order to improve payment acceptance and reduce declines.

In order to be as proactive as possible in clocking suspicious behavior, Chaparova says merchants should have certain preventative measures in place, such as session monitoring, form submission, and other activity data that can alert to potential fraud. Having a chargeback guarantee from a provider is also a smart move.

One particularly powerful tool against fraud can be the use of 3DS for first time customers, a measure that can be exempted for recurring customers. Some tools also allow analysis of user behavior from previous sessions. Such tools should be set up in a way that false positives are avoided as much as possible.

“Merchants cannot afford to absorb the impact of chargeback abuse. It's crucial to embrace cutting-edge, data-driven solutions that unlock the latest protection mechanisms available in the marketplace,” states Chaparova.

“This is not just about today; it is about future-proofing online retail, creating a secure haven that fosters trust and transparency for both retailers and consumers.”

Friendly fraud is just one of many types of financial crimes that retailers must face online. Other major types of fraud that retailers must be prepared to deal with include payment fraud (also known as the most common type of e-commerce fraud) and clean fraud (which uses stolen details that are accepted as legitimate), among others.