Our top picks of timely offers from our partners

More details
National Debt Relief
Learn More
Terms Apply
National Debt Relief helps consumers with over $10,000 of unsecured debt and has operated since 2009
UFB Secure Savings
Learn More
Terms Apply
Up to 5.25% APY on one of our top picks for best savings accounts plus, no monthly fee
Freedom Debt Relief
Learn More
Terms Apply
Freedom Debt Relief can help clients get started without fees up front
LendingClub High-Yield Savings
Learn More
Terms Apply
Our top pick for best savings accounts for its strong APY and an ATM card with no ATM fees
Rocket Mortgage
Learn More
Terms Apply
Rates could continue to rise - look into refinancing with one of our top picks.
Select independently determines what we cover and recommend. We earn a commission from affiliate partners on many offers and links. Read more about Select on CNBC and on NBC News, and click here to read our full advertiser disclosure.

'Friendly fraud' is on the rise, and small business owners may bear the brunt of the impact

Friendly fraud can be a costly problem. Here's how small business owners can protect themselves.

Getty Images

Small business owners are facing an overwhelming host of challenges right now, from having to shutter due to the coronavirus pandemic to struggling to obtain government loans in order to stay afloat. Unfortunately, there's another mundane cash suck that's on the rise: credit card fraud.

One particularly stressful problem is "friendly fraud," which is anything but friendly. It occurs when a consumer receives goods or services and requests a refund (also known as a chargeback) from their credit card company rather than make a return.

As people become more conscientious about their spending, experts expect that friendly fraud will become a more common issue. The global payments advisory and research firm Mercator Advisory Group predicts an uptick in chargeback requests during this time of economic uncertainty, and small business owners have cause to be particularly concerned as they are often the ones left managing the costs.

Below, CNBC Select offers a few tips for how small businesses can avoid chargeback fees so you can better protect your livelihood during this tense time. 

Why small businesses bear the cost of fraud

Most cases of credit card fraud arise when an unauthorized user makes a purchase without the account holder's consent. When this occurs, account holders can dispute the transaction and initiate a chargeback so they can get their money back.

Most major card issuers offer $0 fraud liability that protects the cardholder from paying for unauthorized transactions in the case of clear identity theft. The Chase Ink Business Preferred® Credit Card, for example, is equipped with zero fraud liability, 24/7 fraud monitoring and the ability to lock or unlock your card if you misplace it. And most personal credit cards from major card issuers offer $0 fraud liability, too.

But someone has to pay for the charge. Usually that falls on either the card network (Amex, Discover, Mastercard or Visa) or the merchant. If your business accepts fraudulent payments, the card network may decide it's your responsibility to cover the cost plus additional chargeback fees. According to a report that reviewed data from the Federal Trade Commission (FTC), there were 270,000 reports of credit card fraud in 2019.  (Read more about how to prevent payment fraud.)

Chargeback fees can range from $20 to $100, which is in addition to the cost of your product or service. Plus, businesses are on the hook for credit card processing fees between 1% and 4%. The costs add up quickly, which makes it tough on small business owners who already face thin profit margins.

What business owners can do to prevent friendly fraud

All chargebacks go through the customer's card issuer first, but it's the card networks that set up the rules for disputes, according to president and CEO of Member Access Processing, Cyndie Martini. Once the issuer reviews the dispute, it's sent on to the network. 

Small business owners who find themselves in the midst of a dispute should first review both the network and the issuer's chargeback policies, says Martini. For example, some issuers won't bother to investigate the claim if it costs more to fix the problem than to simply refund the customer's money.

"Charges that are less than $25 will typically not be disputed," she says.

But when you're not covered by your issuer agreements, "the easiest way to avoid the chargeback fee is for merchants to work directly with the cardholder to resolve the dispute." By the time the dispute reaches the card network, the business owner is more likely to see a fee. 

Mercator Advising Group also suggests that businesses should consider updating their refund policies to avoid chargeback fees. While it may seem counter-intuitive to relax your exchange policies during an economic recession, accepting returns is usually less costly than losing chargeback disputes.

To help improve customer satisfaction, make sure your website provides thorough product information and high-quality photos. Streamline the online shopping cart, checkout and receipt delivery so there's no confusion as to what was charged.

It's essential to use secure processing technology for both traditional and contactlesss payments. Look out for the warning signs of payment fraud and take extra steps to protect yourself, especially as so many businesses move sales online. It can have a huge impact on your bottom line, which is essential during this uncertain time.

Don't miss:

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Learn More
Terms Apply
Get paid early with direct deposit and pay no overdraft, transfer, or minimum balance fees