E-Commerce Beginners Guide: Friendly Fraud

Friendly fraud is a term used to describe the situation when the credit card holder purchases goods or services with his own credit card and then claims to have never received them, thus initiating a chargeback dispute through his/her issuing bank.

Tangible products

Merchants dealing with tangible products can protect themselves from this type of fraud by requiring a signature on goods delivery receipt. Signed receipt is a valid argument in a chargeback dispute. Merchants may also request CVV (3-digit number on the back of the card) to avoid of the "card-not-present" claims.

Intangible products

Friendly fraud is much harder to fight with when dealing with intangible products. It is very hard to prove that the products or services were delivered exactly to the credit card holder. Verified by Visa or other security programs testify that the cardholder was present when the transaction was processed, but do not prove the delivery of the product or service. In case of digital subscription service, merchants can envisage the mechanism that suspends the service in case chargeback is initiated. In other cases cardholder is most likely to get electronic goods or services without paying. At that merchant will still have to handle the chargeback fees charged by the issuing bank and the credit card processor (chargeback fees start with $20 and may grow dramatically in the course of a complicated chargeback dispute).