Friendly Fraud on the Rise in B2B Payments

Credit card payments are becoming more common in B2B trade, which means credit professionals must understand the risk that accompanies different payment methods. A recent?eNews?poll revealed that 59% of credit professionals have experienced a customer fraudulently dispute a credit card charge.

This is also known as friendly fraud or a chargeback fraud, when a cardholder identifies a purchase on their transaction statement as fraudulent and disputes it sparking the chargeback process. After surveying more than 300 retailers—from small businesses to enterprise merchants—one of the most alarming statistics revealed in the 2023 Chargeback Field Report “was the spike in increased chargeback fraud; nearly three quarters of surveyed respondents reported a 19% average increase in friendly fraud,” according to?Crowdfund Insider.?According to a report from?Expert Market, friendly fraud is increasing by 41% every couple of years with 86% of chargebacks as probable cases of friendly fraud.

With consumer behavior changing due to the pandemic, digital transactions have increased dramatically resulting in more frequent friendly fraud cases, said Sudipto Chakravorti, VP and head of merchant fraud products at Fiserv, Inc. (Berkeley Heights, NJ). The risk of credit card fraud typically falls on the credit card company. However, “for e-comm (card not present) transactions, the majority of the risk is on the merchant unless the transaction is authenticated by the issuer using 3D secure technology,” Chakravorti added.

For in-person transactions, ensure that the information matches to avoid fraud like identity theft or faulty credit cards. “We require that the customer’s driver’s license matches the name on the credit card presented,” said Anne Scarcella, CCE , CCRA, credit manager at Crawford Electric Supply Company, Inc. (Spring, TX) who does not accept credit cards over the phone for any orders at her branches. “If the customer gives us any pushback or the ID number, name or credit card does not align, we will only process the sale on cash terms.”

The same verification process applies to online orders. Scarcella has a digital team with a standard operating procedure (SOP) that processes online orders. “We have turned down many orders of suspected fraud,” she added. “But even then, we have our fair share of chargebacks under the ‘fraud’ category.”

Other tips for mitigating risk with credit card payments include:

• Prioritize security for online and in-person payments.
• Have clear return and refund policies.
• Manage shipping expectations.
• Make sure the real company name shows up on credit card statements.
• If a customer's dispute of the charge seems obviously incorrect, gather and provide credible evidence to the issuer to defend against the dispute or chargeback (CB).

Companies end up losing money as they dispute larger amounts over smaller amounts. Large dollar amounts are more often disputed by the customer or issuer. “As for small dollar amounts, the issuer credits back the amount to the customer without a chargeback to the merchant since the operational cost of the dispute or chargeback process exceeds the amount being disputed,” Chakravorti said.

Artificial Intelligence (AI) is transforming nearly all industries, and ecommerce is no exception. Online businesses are using AI to streamline operations in fraud detection. “AI can balance out denying fraudulent transactions, which can be extremely expensive, and allowing legitimate transactions, which maintains their reputation,” said Chakravorti. “Where merchants once employed legions of employees dedicated to reviewing transactions, algorithms analyze millions of data points to flag irregularities and fraudulent behavior.”