What Is 'Friendly Fraud' Costing Your Business?

Merchants need a smarter way to beat bogus chargebacks

By Roenen Ben-Ami, Co-Founder and Chief Risk Officer at Justt

This month, passengers attempting to board their Ryanair flights to Dublin got an unpleasant surprise: they were told they couldn’t travel unless they first paid the budget airline hundreds of euros. The passengers had previously used credit card chargebacks to improperly recoup the cost of tickets left unused due to COVID-19 travel restrictions, officials explained, and they wouldn’t be allowed to fly home unless they paid up.

The episode was a PR disaster for Ryanair, which was accused of holding passengers hostage. But it points to a broader problem: the pandemic has driven credit card disputes through the roof, and merchants frequently feel they have no real recourse against first-party misuse of chargebacks, more commonly known as “friendly fraud.”

Payment card fraud losses, which include both conventional and friendly fraud, rose above $32 billion worldwide this year, up more than a third from 2017 levels, according to the Nilson report. Overall, the cost of card fraud rose to an all-time high of 7.1 cents per $100 in order volume. Ryanair’s confrontational approach clearly isn’t the right path forward — but with the pandemic sparking a lasting surge in ecommerce purchases and mobile payments, merchants urgently need smarter and more effective ways to fight payment card fraud, including friendly fraud.

A growing problem

As things stand, about one in every 2,000 online transactions results in a chargeback, according to Mercator Advisory Group. That might not sound like a lot, but U.S. merchants alone handle well over 50 billion transactions a year. In fact, by next year it’s estimated that merchants will see well over 33 million disputed transactions, a 32% increase from 2020.

That trend is forcing card issuers to rethink their dispute management platforms, Mercator notes. “To keep up, any card issuer should consider evaluating its current solution with regard to speed, scalability, and versatility."

But the same is also true of merchants: in the face of proliferating friendly fraud, sellers need smarter solutions to protect their revenues.

Unfortunately, many merchants currently view these disputes, and the lost revenues associated with them, as part of the cost of doing business. That’s a consequence of the archaic and incredibly complicated process for trying to fight baseless transaction disputes: gathering the information that’s needed and submitting a counterclaim in a timely manner is simply impractical for most businesses. Unless a dispute involves a really large amount of money, it’s often easier simply to write it off. That’s doubly true during the pandemic, when merchants are facing all kinds of new challenges, including labor shortages that make dispute management even harder to handle effectively.

A perfect storm

The trouble, of course, is that this starts to seem rather like an irresistible force confronting an immovable object. Merchants can’t just keep writing off chargeback costs as “friendly fraud” rates spiral ever-upward; eventually, doing so will become too expensive a proposition. But by the same token, companies can’t afford to keep pouring more and more money into in-house chargeback mitigation processes that seldom deliver much in the way of real returns.

What’s needed is a new approach — a sword with which to cut through the Gordian knot of complex regulations and hard-to-navigate processes needed to push back against improper transaction disputes. Fortunately, new technologies are now emerging that can level the playing field and help organizations to push back against friendly fraud.

Using AI tools and industry-specific expertise, it’s now possible to detect friendly fraud quickly, and almost instantly pull together the resources and information needed to convince a financial institution that a chargeback should be denied. Done right, that can save merchants large amounts of money.

A smarter solution

As things stand, about four-fifths of online merchants have no chargeback mitigation solutions in place — despite the fact that 86% of all reversed transactions are actually illegitimate claims. Looking at those numbers, it’s easy to see how organizations wind up frustrated, and how some — like Ryanair — can wind up taking those frustrations out on their customers.

But that only goes to show why a smarter approach is needed. When you manage “friendly fraud” effectively, using integrated digital tools, you can keep hold of more of your business’s hard-earned money, and you can achieve that goal seamlessly in a way that never leaves your customers feeling like you see them as the enemy.

The bottom line is that in the post-pandemic era, businesses can no longer afford to simply ignore friendly fraud. But they also can’t afford to take an us-vs-them approach to their customers. It’s time to find a smarter solution — one that will allow businesses to stop hemorrhaging revenues, but also enable them to stay focused on providing amazing customer experiences as they grow their brands.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.