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Friendly Fraud: The Secret Threat to Your Ecommerce Business

Is your e-commerce website taking appropriate steps to prevent fraudulent use of credit cards when placing orders? That's a great first step — but it's not always enough. In addition to credit card fraud (someone making a purchase with a stolen credit card or credit card number), e-commerce merchants can also be hit by "friendly fraud."

In friendly fraud, the purchase is legitimately made by the credit card holder or someone in their family. However, when the purchase arrives or the charge shows up on the credit card bill, the cardholder claims they never made the purchase, and requests a refund.

The problem for e-commerce retailers is that often, cardholders don't bother contacting your company to ask questions or dispute the charge. Instead, they simply go through their credit card company to dispute it. This can lead to substantial losses for e-commerce businesses. On top of losing the product and the cost of the product, you're also likely to face chargeback fees from the credit card company.

An estimated 28 percent of the $6.7 billion in e-commerce fraud that occurred last year was friendly fraud, according to a Lexis-Nexis study. Fortunately, there are some simple steps you can take to help minimize the frequency of friendly fraud. Here's what to do:

1. Communicate with customers from the time a purchase is made until after it's delivered. The more you keep the lines of communication open, the less likely customers are to forget about or dispute the charge. Send triggered emails confirming the order, alerting the customer when it ships, and following up after the product was delivered. A few days after delivery, follow up again with an email asking the customer if they are satisfied with the product and encouraging them to review it. Be sure all of the emails include multiple ways to contact your customer service department in case of a problem. The multiple emails will serve as reminders, and if there is a problem with the actual product upon delivery, the email requesting a review should prompt the customer to contact you.

What about subscription services, such as an online service or beer of the month club? It’s easy for customers to lose track of when a subscription renews, especially since many subscriptions are purchased as gifts. Send the customer a couple of alerts starting at least a month before a subscription is due to renew. Be sure to include a link they can use to modify or cancel the subscription if so desired. You can reduce the chance of complete cancellation by providing options to "pause" the subscription, reduce the frequency of delivery, or downgrade to a lower-cost subscription.

2. Be transparent about costs. Your checkout process should be easy to understand, with item prices, the number of items and additional costs for shipping, taxes or rush delivery clearly displayed. You don't want a customer to dispute a charge because they forgot that the $30 item they ordered cost an additional $20 for overnight shipping. If you sell subscription services, make sure the terms of the subscription are clear from the beginning.

3. Make sure your company is described appropriately on credit card statements. It should be easy for credit cardholders to identify the source of her charge. If for some reason your business name appears differently on credit card statements than the business name your customers are familiar with, clarify that before the purchase is made. When the customer places the order, display a pop-up window or other alert that says something like, "This charge will appear on your credit card statement as XYZ Holdings Ltd.” Include the same information in future communications regarding the purchase.

The most important step you can take in preventing friendly fraud? Provide helpful, easy to access customer service. If a customer perceives contacting your company as a huge hassle, or they can't quickly figure out how to do so from your website's homepage, they're more likely to go straight to their credit card company to dispute a charge. If they know that talking to your customer service department is a quick and friendly process, you’re less likely to end up dealing with friendly fraud.