In the business world, it’s common to refer to any chargeback that isn’t true fraud as ‘friendly fraud.’ However, for merchants like to your benefit, you need to distinguish one from the other. While they may have similar characteristics, some differences greatly separate a friendly fraud from chargeback fraud.
Even with the implementation of preventive measures to avoid recurring billing chargebacks, these inconveniences still occur every month. It’s so rampant that you can tell your business is falling victim to fraud right now. However, you’re not dealing with a professional hacker or an organized crime organization. Instead, you’re at the mercy of your legitimate customers. In fact, studies show that friendly fraud and chargeback fraud take up the bulk of fraud losses among businesses around the U.S.
Chargeback fraud, in particular, accounts for 30 percent of total revenue lost. When you combine that with friendly fraud, you’re looking at a 71 percent loss in total revenue due to fraud. That’s why it’s essential not only to be familiar with these two but also to know their distinct differences.
This article will do just that as we discuss everything you need to know about friendly fraud vs chargeback fraud.
Understanding Reason Codes
It’s a common belief that reason codes are lagging indicators. However, they are not always fraud indicators. When you run a business, you should know that every customer dispute is categorized using a card network-specific chargeback reason code. Currently, there are around 151 of these reason codes across different platforms such as MasterCard, Visa, Discover, and American Express. While each of these cards has plenty of reason codes, they generally fall under two categories: fraud and non-fraud.
A fraud reason code indicates a dispute regarding authorization discrepancies, fraudulent activities, and liability shit issues. On the other end, a non-fraud reason code is all about customer disputes with shipping problems, recurring billing chargebacks, and issues with the product or service.
A chargeback that’s categorized under fraud reason codes doesn’t automatically indicate that it’s true fraud. The only method of revealing the reason for the chargeback is to submit a comprehensive response that’s specific to the used reason code.
Losing Fraud-Related Customer Issues
If the majority of reason codes that your business encounters are fraud-related and you lose them after submitting compelling evidence, it’s an indication that true fraud problems are existent. For that matter, fraud prevention tactics such as AVS and CVV can be bolstered by adding advanced safeguards like 3D secure, automated transaction scoring, fingerprinting, and device ID tools.
Losing Non Fraud-Related Customer Issues
Suppose the majority of reason codes that your business gets are non-fraud-related, and you lost after responding. In that case, it’s a clear indication that you need to examine and assess your business operations. Chargebacks that are non-fraud-related have plenty of corresponding reason codes. The majority of them represents recurring billing, Merchandise not as described, and goods not delivered issues.
Recurring Billing
Recurring Billing represents several dispute situations; the most common being corresponding chargeback reason codes by card network are as follows:
- The cardholder notified the merchant (you) to cancel the recurring transaction, yet the recurring billing continues to take place.
- Cardholder claims that they were unaware of the recurring transactions being made.
- The cardholder doesn’t recognize your merchant descriptor on their billing statement.
- The card on record was expired or not valid when the transaction took place.
Of these four dispute situations, the most common is the cardholder not recognizing your merchant descriptor. Your merchant descriptor should include the following:
- Your Business Name
- Link to your Website
- Customer Support Phone Number
Keep in mind that this will depend on the nature of your business.
Merchandise Not as Described
This chargeback indicates that the product you’re describing is not representative of the actual product that your customers receive. If you can recall, when was the last time you’ve updated your product description? Most’ Merchandise Not As Described’ problems stem from product description inconsistencies.
To make sure you avoid this type of chargeback, make sure your product description accurately describes your product. You can also add other useful resources like a picture, video, or even actual reviews from your past customers.
Goods Not Delivered
This type of chargeback is not uncommon. However, if you’re seeing them in large amounts and being lost, there could be potential issues with shipping and delivery. Do your customers get a unique tracking number for their ordered items? Are they notified by your company of any potential delays that impact the arrival time of the product? There could also be issues with your chosen courier or shipping provider that needs immediate action.
Overcoming a Customer Dispute
When a chargeback is ruled in your favor, it’s a big win and a relief for you and your company. However, winning a chargeback also means that your business was almost a victim of either a chargeback fraud or friendly fraud. That’s why it’s also essential that we mention this next bit:
Friendly fraudsters should be nurtured, while chargeback fraudsters should be blacklisted. Let’s elaborate further:
Friendly Fraud – Unintentional
A customer who commits a friendly fraud should not be considered as a threat or a menace to your business. This person is likely misguided, forgetful, or maybe just confused. Customers who do friendly fraud are the direct result of an honest mistake. To prevent friendly fraud, you need to be considerate of your customers’ feedback.
For example, let’s use subscription service providers. This field usually manifests in customers who legitimately agreed to recurring billing. However, they were genuinely unaware of what they were agreeing to. Keep in mind that only a hand few of people read terms and conditions.
No matter how many opt-ins and fail-safes your business uses, most people who acquire your services do not read the terms and agreement. Instead, they just opt-in without even knowing what they agree to. However, that doesn’t mean the customer won’t be interested in your services in the future.
It also doesn’t mean that the customer should be blacklisted from making legitimate purchases from your business moving forward. Instead, you should understand and determine the root cause of the customer’s misunderstanding. That way, you can prevent it from recurring in the future.
Chargeback Fraud – Intentional
Customers who commit chargeback fraud do it with malicious intent. These people pose a threat to your business as their attempts are deceitful and dishonest. In fact, most business gurus claim that chargeback fraud is similar to shoplifting. Therefore, the people who attempt to carry it out should be handled with the same consequence as a thief in a brick-and-mortar scenario.
Blacklisting a customer who attempts a chargeback fraud is a serious consequence. However, it’s only appropriate to protect your business and revenue.
How To Distinguish Friendly Fraud from Chargeback Fraud
By now, you already have an idea of both friendly fraud and chargeback fraud. However, how do you distinguish one from the other? When your response is as serious as blacklisting a customer, it’s only right that you make sure you understand the concepts of both these frauds and not mistake one from the other.
The best way to tell whether a won dispute was a friendly fraud or a chargeback fraud is to communicate with the customer who initiated the dispute. By that point, you’ve already spoken to the customer regarding the transaction at hand. So, continuing the communication shouldn’t be much of a stretch.
Either way, you have the chance to gain some insight into the customer experience. Discovering a chargeback or friendly fraud in your assessment will become clearer as you speak to the customer responsible.
Revealing a Chargeback Fraud
A customer who attempted to commit a chargeback fraud will try to avoid contact from you of any form. If you do manage to reach out to this person, they will remain adamant about being the victim of fraudulent activity. So, if the customer is trying to avoid you or isn’t replying to your messages, then there’s a good chance that this person is a chargeback fraudster.
Revealing a Friendly Fraud
As you might guess, a chargeback fraudster is an exact opposite. This person is open to communicating with you to discuss his or her dispute. That way, it can be resolved in the right manner.
People who commit friendly fraud are usually very transparent regarding their opinions and experience with the entire transaction. Whether they were unsure of how to get in touch with you or they simply didn’t recognize how your company name appeared on their billing statement, it’s very much clear that they don’t have any bad intentions whatsoever.
Prevent Fraud with ReliaBills
Dealing with fraud can be pretty daunting, especially if you’re running your business manually. You need a system that can help you detect fraudulent accounts while also billing your customers simultaneously. That’s why you need ReliaBills.
ReliaBills is more than just a simple invoicing system. We also offer superb recurring billing software that you can use to automate your entire payment process. Our approach is simple and easy to set up. All you need is to create a free account, and you’re all set to get started. We have top-notch features that will help you make your payment process easier, convenient, and secure.
Automated Invoice Creation
Create awesome invoices while also scheduling them to be sent on the exact date and time. With ReliaBills, you’ll spend less time doing your invoices since everything is done automatically. Once you’ve created and scheduled your invoice, our system will handle the rest — from sending to getting you paid.
Automated Variable Payments
The best way to increase your customer base is by making it super easy and convenient to do business with you. With ReliaBills, you can enroll your clients into AutoPay and have them authorize you to take payment from their account automatically. Even if your pricing changes every month, you will be able to bill your customers automatically once they permit you.
Invoices Designed for Recurring Billing
ReliaBills makes sure that every invoice you create is explicitly made for recurring billing. Each invoice will typically display the open invoice balance, open account balance, and other potential open invoices. All you need is to set it to recurring and watch our system do the rest of the work for you.
Failed Payment Mitigation
Just because a payment failed doesn’t mean it’s fraud. It can be due to numerous other factors like expired cards or inaccurate payment details. Fortunately, this can be fixed with recurring billing. We’ll make sure payment will be delivered even if it hits a roadblock. Once our system detects a failed payment, it will reattempt the payment automatically. You and the customer will also receive a notification about the issue to be resolved right away.
Secure Payments
With a customer portal, your customers can save and store their payment information without fearing fraudsters and cybercriminals getting their hands on these valuable details. Their credentials are stored in a safe and secure cloud that will enable you to collect payments from them automatically without asking permission every month. Your clients will also appreciate the ‘set-it-and-leave-it’ factor.
Is Recurring Billing Essential?
If you want to make payments and tracking fraudulent accounts easier, you should consider transitioning to recurring payments. It’s a faster and more convenient option that will provide you with many options to keep the money flowing while preventing as many frauds and online scams as possible. ReliaBills will help you improve your payment processing system and make sure that you get the most value out of your efforts.
Wrapping Up
Fraud prevention starts with understanding the situation. By understanding chargeback reason codes and submitting appropriate responses, you can win back revenue for your business. At the same time, you can also identify good customers from bad ones. It’s always important to nurture the good ones as they are the ones that tend to stay and do business with you for a long time.
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