Fraudulent behavior isn’t necessarily perpetuated by people hiding their identities. For example, legitimate customers sometimes use the credit card chargeback process to their advantage — and to the disadvantage of merchants. Others routinely abuse chargebacks to steal merchandise. Here’s how to protect your business from these types of “friendly” and sometimes dishonest fraud.

Chargeback Mechanics

Friendly fraud pivots on a customer’s failure to communicate with a merchant. Instead of contacting a seller to discuss a problem with a good or service, some customers immediately dispute a charge with their bank or credit card company. They generally provide plausible reasons for the dispute and don’t mask their identity at any phase of the process.

A chargeback takes time and effort to resolve. And if the bank or credit card company honors a customer’s dispute (which they often do), the merchant must assume the loss.

4 Steps

To prevent such chargebacks from harming your bottom line:

1. Track shipments. Keep an “eye” on orders from the moment they leave your facility to their arrival at a customer’s location. For shipments worth more than a certain amount, consider requiring the customer’s signature to release it from the shipper’s possession. With a robust document trail, you’ll be able to support your denial of a chargeback — even if a customer claims he or she didn’t receive the goods.

2. Communicate your refund policy. Create a detailed refund policy and communicate it to customers throughout the shopping process and when the sale is made. For example, post signs in your store or notices on item pages of your website. Just keep in mind that an overly restrictive refund policy may create an incentive for customers to go directly to their credit card companies to dispute a transaction.

3. Invest in customer service. Some customers resort to chargeback requests because they’ve had trouble contacting or reaching a resolution with the merchant. Make sure you provide customers with multiple support channels, such as phone, email, and instant message. Additionally, give customer service personnel the authority to resolve disputes quickly — including issuing refunds or credits without supervisory approval.

4. Watch customer activity. Collecting and analyzing customer data can deepen your company’s understanding of purchasers’ behavior and help detect anomalies. For example, if a customer frequently checks the status of his order and then denies placing the order, you may be able to use this fact when disputing a chargeback.

Play Defense Against Friendly Fraud

It’s important to understand that not all chargeback requests are hostile or intentionally fraudulent. But you also need to protect your business from bad actors. Contact us for more information on “friendly” fraud.

© 2021

Tony LaNasa

Tony LaNasa,
CPA/CFE
anthony.lanasa@hwco.cpa