Friendly fraud accounts for about a fifth of the fraud experienced by online merchants, according to a recent report from LexisNexis. While hardly “friendly,” what’s generally referred to by retailers and the payments industry as friendly fraud occurs when consumers dispute seemingly legitimate charges made to their credit cards. This may happen for various reasons: a consumer may want to wriggle out of paying for product, may be unaware another household member made the purchase or may have forgotten about a transaction they made or not recognize the biller’s name and think it is an illegitimate charge.

Experts say that minimizing such fraud losses requires e-retailers to figure out ways to communicate better with customers, including clarifying customer service polices, and sometimes fighting back, according to the upcoming March issue of Internet Retailer magazine. 

Enough merchants have done so, and have shared their tactics, that one payments expert anticipates positive movement in the coming years. “It will decrease,” predicts Karisse Hendrick, e-commerce fraud and payments program manager, Americas, for the Merchant Risk Council, a Seattle-based industry group that promotes e-commerce payment security. She says improving communications between retailers and customers and an improvement in the economy will make fewer consumers seek to reverse the charges on their payment card bills, leading to reversals known as chargebacks in which funds previously credited to a merchant are taken back.

She bases her optimism largely on the talks she regularly has with web merchants about fraud issues. Nonetheless, those merchants remain very concerned about friendly fraud, she says.

In the 2013 online fraud report from CyberSource Corp., a top provider of payment security and payment systems to e-retailers ranked in the Top 500, 59% of surveyed merchants, all of which had annual e-commerce revenue of $25 million or more, reported that they thought friendly fraud had increased over the past two years. Friendly fraud ranks third—behind account takeovers and “clean fraud” (the industry term for fraudulent transactions that appear legitimate and slip past merchant checkpoints)—among perceived fraud threats.

The “LexisNexis Trust Cost of Fraud Study” from September 2013 says that friendly fraud in the United States accounts for 18% of fraud suffered by merchants, according to survey results. That’s the same as 18% in 2012 and down from 19% in 2011 and 20% in 2010, when the economy was worse than it is now.

E-retailers can incur chargebacks for instances of friendly fraud, and for other reasons, including legitimate disputes over purchases the retailer doesn’t resolve to the consumer’s satisfaction, transaction errors and when thieves steal a consumer’s identity and make purchases. A friendly fraud chargeback, however, typically looks like this: A cardholder calls his card issuer and disputes a charge made to his account. That bank debits the charge from the merchant’s account. The merchant is informed of the chargeback, which the merchant can accept or dispute. A merchant who decides to dispute the chargeback gathers what evidence it has that shows the transaction was legitimate and sends its version of the case to the payment processors and credit card issuer. If the merchant wins, its account is again credited for the original amount. “The merchant can be credited the amount only if the dispute is found in their favor, after presenting the necessary details that the cardholder was aware or participated in the transaction,” Hendrick says.

Based on her research, Hendrick estimates that friendly fraud can account for between 25% and 40% of e-retail chargeback volume. Another payments executive, Monica Eaton-Cardone, co-founder and chief operating offering of Chargebacks911—which for a monthly fee starting at $500 helps retailers avoid and challenge chargebacks—says that for some clients, up to 70% of their chargebacks stem from friendly fraud.

E-retailers concerned about so-called friendly fraud have a common complaint: Some consumers, accustomed to the generous, 90-day, few-questions-asked online return polices offered by retailers such as Wal-Mart Stores Inc. and Costco Warehouse Corp., think little of using a product they’ve purchased, then returning it to the merchant for a refund. The merchant absorbs the loss, all but certain that challenging it with the issuer will result in wasted time and eventual defeat.

One U.S.-based e-retailer, who sells both in the United States and abroad, makes that complaint with vigor. This merchant demanded anonymity so as to not make trouble with payment card processors or issuers, or customers. A relatively small web merchant, this executive estimates that friendly fraud accounts for 40% of his company’s chargebacks and more than $100,000 in lost revenue annually.

For more about the scope of friendly fraud, and what merchants can do to reduce its impact, subscribe for free to Internet Retailer magazine and read “Not-so-friendly fraud” in the upcoming March issue. 

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