21 Oct 5 ways to prevent friendly fraud and chargebacks

Chargebacks, the reversal of a money transfer to a payer’s (most commonly a consumer) account by the issuing bank when a transaction is successfully disputed, have increased in recent years with the accelerated rise in card and online payments.

While chargebacks are necessary in consolidating consumer confidence in card and online purchases, particularly in today’s world where businesses are more reliant than ever on accepting cashless transactions, chargeback disputes can cause understandable stress on business owners given the resource and time required to dispute a claim, as well as the financial impact they can have.

However, friendly fraud and merchant are becoming more prominent  as reasons behind unnecessary chargebacks. We look at what they are, how they occur and how your business can prevent them from happening.

Friendly Fraud, Merchant Fraud and Merchant Error

“Friendly” Fraud

Friendly fraud differs from regular fraud as it comes from the cardholder or someone with legitimate access to the cardholder’s account and not a third party. This can be accidental and without fraudulent intent.

Cardholders might mistakenly dispute charges they made because they forgot they made the purchase or they don’t recognize the business listed on their card statement due to a different business name appearing. Also, family members linked to an account might make purchases unknown to the primary cardholder, who then initiates a chargeback request.

However, friendly fraud isn’t always accidental. Cardholders may dispute a purchase because they have buyer’s regret. They could also be trying to con the system and profit from a transaction, gaining both a product/ service as well as their money back through a chargeback.

Merchant Fraud or Merchant Error

Merchants can be deliberately or accidentally liable in a chargeback dispute depending on the circumstances.

Merchant fraud

The most straightforward examples of a business taking advantage of a transaction involves:

• Deliberately failing to ship a product or provide a service after payment has been accepted.
• Selling a product as authentic but delivering a fake or damaged product on purpose.
• Charging a higher price or unexpected additional fees/ charges than the customer had agreed to or expected.

In these instances, a business will be found liable in a chargeback dispute and the merchant may also incur penalties, fines and additional fees.

Merchant error

Chargeback disputes occurring from merchant error can be difficult for a business to accept, so it’s important to know how they may occur:

• Customers receiving defective merchandise by accident- which may have become damaged in transit after the merchant has shipped it.
• The overselling of a product or service’s description by the business owner, staff or online description as the consumer may feel misled if the specifications fail to match their expectations.
• Unclear subscriptions and cancellation policies with a product or service.
• Difficulty and inability for a customer to engage with a business over issues they have with the product or service they’ve purchased. This can lead to the cardholder issuing a chargeback claim as they may feel it’s their only route to receiving a refund.

How can you prevent merchant error and friendly fraud chargebacks?

Use accurate descriptions on products/ services and on card charges

Whether selling in-person or online, clear and accurate descriptions of product and services can alleviate the possibility of chargebacks. This is also true for a business’ name on a customer’s bank statement to avoid confusion.

Clearly state the price and final cost to the customer

It’s important all charges and fees are included in the price to your customers, or that the pricing clearly states it excludes VAT if it does so. By doing so, customers are fully aware of what they will be charged before making any purchases.

Shipping policies

Clear engagement around shipping times, while also ensuring there is no delay from the business when posting a product to a customer, will limit chargeback opportunities.

Clear refund policies and engagement

Offering a refund, where applicable, is less costly and stressful than being involved in a chargeback case. By clearly signposting how and why a customer may request a refund, as well as having open channels of communication for customers to follow up with, will limit the necessity for chargebacks. You can also ask your customer to agree to your refund and return policies at checkout.

Offer Dynamic Currency Conversion to international customers

When visitors from overseas make purchases abroad using a foreign currency, they can become confused when they don’t recognise a transaction on their bank statement statement or disagree with the conversion rate.

Allowing them to pay in their own currency through DCC at the point of sale can limit any confusion and disagreement leading to a potential chargeback. The value is shown as the ‘Final Price’ in their currency and the price is calculated at ‘Today’s Exchange Rate’ and will not change. You can also earn your business a rebate!