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Tips for preventing friendly fraud 

Ecommerce is challenging enough and there's all sorts of fraud perpetrated by organized groups, but one of the most insidious is friendly fraud - as every single one of your customers is a potential perpetrator.

What is friendly fraud?

Friendly fraud is not a good term as there's nothing friendly about it. It's simply fraud, it's theft, it's a crime and those who perpetrate it need their asses solidly kicked in a court. However, it's rarely prosecuted.

Friendly fraud is where a cardholder makes a purchase, then issues a chargeback once they've received the goods or services - usually with the excuse of "unauthorized transaction" or the goods never arrived. 

Friendly fraud is especially prevalent when it comes to digital goods and services. I saw this happen many times in the hosting industry. For example, a person would sign up for an account as they had a money-making idea in mind, build a site, find out making money on the web isn't as easy as they thought then issue a chargeback, stating they never signed up for the account. 

It can be very tough to fight without the right supporting evidence, and even with it, it's still a challenge. While consumer protection for unauthorized card transactions is a great idea, unscrupulous individuals know that the card-issuing bank will always side with the consumer. 

Even if you can prove receipt of goods and avoid a chargeback, it's an incredibly time-sucking exercise that costs your business money and can really impact your bottom line if it happens often enough.

Preventing friendly fraud - tips

While it's very hard to stop anyone attempting friendly fraud; you can reduce the chances of it resulting in a chargeback and streamline the process for dealing with the issue so it's not such a burden on your business. Any of the following tips on their own may not help you in a chargeback challenge, but when combined, the card-issuing bank will have a harder time refuting your challenge. These tips are also a part of general credit card fraud screening strategies.

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1. Save IP information

Ensure you keep a record of the IP address of the signup. This can usually be found on the merchant receipt. I've used this information in the past to challenge chargebacks as a part of supporting evidence and I believe it does help. For example, if the IP traces back to a specific town, the "friendly fraudster" lives in that town and the delivery address was also in that town; it does tend to cast suspicion back on the cardholder.

2. Collect CVC data

Request the Card Security Code, also known as Card Verification Code (CVC) on the credit card during the checkout process. These are the three digit groups on the backs of Visa, MasterCard, and Discover cards, and the four digit on the front of American Express cards. It's just an added bit of data that reduces the incidence of fraud.

3. Require a signature for physical goods

Unless you know the customer, it's probably best not to allow deliveries to be left at the address if nobody is at home - require a signature. This helps prevent people claiming the goods never arrived

4. Keep all communication records 

Keep every single exchange you have with your customers, whether it's email or live chat sessions. Often they'll reveal all sort of personal information during communication that can help you prove during a chargeback challenge the authorized cardholder did participate in the transaction.

5. Call the bluff

Sometimes the would-be friendly fraudster will contact you first demanding a refund and stating that their card has been compromised. If in doubt as to the validity of the claim, be polite, but mention that if that's the case; they should contact their bank immediately as their card will have to be deactivated. Ask them to let you know once that's done and to provide evidence that it has occurred before you'll issue a refund. Also point out to them any other evidence you have, such as communications, IP address etc.

Remember that most friendly fraud isn't by career criminals, just ordinary unscrupulous folks who think they've discovered a great idea for getting freebies - often they won't have nerves of steel and challenging them will the problem disappear. 

Friendly fraud protection

Some services are available to help mitigate the impact of friendly fraud. The first group are user authentication services, but these tend to cause friction in the sales process. While you might have less friendly fraud by using these services, your customers having to jump through these authentication hoops may also scare away legitimate business.

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The other group of services offer transparent, seamless fraud screening to help combat all types of fraud. Some companies such as preCharge offer a guarantee the if you receive a chargeback while using the preCharge Certified Payments Program, you will not be liable for that chargeback fee.

Friendly fraud isn't going to go away soon, nor are the many other types of fraud you'll encounter in ecommerce, so also check my full guide to anti-fraud strategies and article on preventing and challenging chargebacks.

Michael Bloch
Taming the Beast
http://www.tamingthebeast.net 
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In the interests of transparency and disclosure, please note that the owner of Taming the Beast.net often receives goods and services mentioned in reviews for free, or may receive payments or affiliate commissions for advertising or referring others to merchants of products and services reviewed.

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