There’s a new brand of fraud in town that business owners have to account for. It’s called “friendly fraud,” a process where people file reports with their banks or card issuers claiming that a legitimate purchase was actually unauthorized. The consequences for businesses are serious. When banks receive these reports, they’re quite likely to side with their customers. As a business owner, you may be left holding the bag when your card processor rips the money out of your account to hand it over to a customer who also received whatever product you sold. Here’s a detailed account of the problem as well as advice on how you can defend against it.
Why is friendly fraud so prevalent today?
There are many sociological explanations for the expansion of friendly fraud, including the fact that the down economy has forced more individuals into survival mode. More importantly, the types of legitimate fraud have gotten more advanced, allowing people to readily claim they were defrauded when nothing bad actually happened. For instance, today’s thieves don’t even need a physical copy of a card to use it. They can skim the number and make a duplicate. This allows friendly fraudsters to claim their card was used without also claiming it was lost or stolen.
What businesses are most likely to get clipped in friendly fraud schemes?
Any business that operates only online is much more likely to run into problems. If customers don’t run the risk of being seen by staff or cameras, they can file these claims against merchants. Likewise, any business that sells a digital good could face issues. Friendly fraud becomes more difficult when a person has goods shipped to his or her home. The shipping record can be evidence that the sale was legitimate. If you’re actually selling a digital good, it’s easier for the customer to claim friendly fraud because you won’t have the documentation you need to show that the customer actually made the purchase.
Defending through deterrence
The best way to defend against friendly fraud is to encourage people not to do it. In order to do this, you may think about a two-factor authentication system. With this kind of arrangement, a person will have to enter a verification code either from email or their cell phone. It will be quite easy to prove a person actually made the purchase when they had to confirm it with a code sent to their phone. Likewise, when people know this information is on file, they’ll be less likely to attempt this fraud. In addition, you might enroll in a service like the one offered by Mastercard, which requires additional verification, including a Social Security number. While this might make the purchasing process more difficult, it will deter fraud.
Ensuring that your process is sounds
Many mistakes by business owners give customers the green light to attempt some form of fraud. For instance, if you’re charging additional fees the customer doesn’t know about, he or she could legitimately claim an authorized transaction on the basis of not recognizing the charged amount. On top of that, you’ll want to process all transactions with the name of your company clearly listed. Some online businesses get in trouble because they process credit cards through a different name. Not only will this give customers the ability to defraud you, but it might even lead to customers committing friendly fraud without meaning to because they don’t recognize your business’s name. Handle transactions in a wholly transparent manner to take away some of the tools and justifications of nefarious customers.
How friendly fraud impacts a business
Friendly fraud can be costly and time-consuming. If you send out a product and then suffer this fraud, you’ll be out the cost of goods plus whatever fee the credit card processing company wants to charge. In many cases, you’ll incur a $25 or more fee for every instance of friendly fraud. If the credit card processor finds you didn’t properly verify the customer’s identity, you may be fined even more. Worse than that, too many instances of chargebacks can cause a credit card processor to either drop your company or up your rates so much that it will no longer be feasible to use that company. This is a major concern for merchants that depend heavily on online sales to make it.
Companies serious about trying to protect themselves should be aware of all the little tricks consumers can use to steal your money and harm your reputation. Friendly fraud is one of the newest, and it’s on the rise. While there aren’t methods to totally prevent these claims, you can take certain steps to protect your interests and reduce the number of chargebacks you face.
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