The Hidden Cost of Friendly Fraud in E-commerce: Global and UK Impact (and how to fix it)
- Dan Cluderay
- Sep 27, 2024
- 3 min read
Friendly fraud is becoming a serious issue for e-commerce businesses worldwide. This type of fraud, where customers claim a product was never delivered or was damaged upon arrival, is often difficult to detect and can lead to significant financial losses. While some of these claims are genuine, an increasing number are not, resulting in unnecessary refunds or replacements. Friendly fraud is expected to cost businesses worldwide around $30 billion annually, with the UK alone contributing an estimated £1.5 billion to this figure.
The Mechanics of Friendly Fraud
Friendly fraud typically starts with a customer making a claim that a product was either not delivered or damaged during transit. While companies often take these complaints at face value, they have little way of verifying the legitimacy of each claim, and fraudsters exploit this weakness. Businesses suffer not just from the immediate loss of revenue but also through extra costs incurred from chargebacks and increased shipping expenses.
In a study conducted by the Fraud Practice, it was found that 86% of chargebacks were cases of friendly fraud, and 81% of those customers made the purchase again. This shows that repeat offenders are highly likely, costing businesses dearly in the long run. Friendly fraud has become the modern shoplifting, but with digital footprints that are far more complex to trace.
Real Business Experience
One business owner highlights the frustration of dealing with such claims:
"When customers say one of the items in an order has not been delivered, it's really easy for us to review the packing process and see the item go in the box. When we suggest they check again, as we have watched the recording of the item being packed, it's amazing how quickly they then find the product! Funny as well, because it always seems to be the most expensive item."
This anecdote underscores how companies are beginning to use technology to fight back. The key lies in implementing robust systems that document every stage of an order’s journey.
Estimating the Financial Toll
Let’s put the numbers into perspective:
UK Losses: With the UK's e-commerce market worth an estimated £120 billion, if even 1-2% of this figure is lost to friendly fraud, it totals approximately £1.5 to £2 billion.
Global Impact: On a global scale, friendly fraud costs retailers an estimated $30 billion annually, making up a significant proportion of the $125 billion that businesses lose overall due to chargebacks.
Given these staggering figures, it’s clear that friendly fraud is not just an occasional problem—it’s a widespread issue that needs to be addressed on a structural level.
How Dark Store Systems Can Help
Dark Store Systems provides a robust solution to these problems. By integrating technology such as AI-based barcode scanning, facial biometric authentication, and serial number tracking into the fulfillment process, businesses can greatly reduce the instances of friendly fraud(Dark Store Systems - Ma…)(Dark Store Systems - Ma…). Here's how Dark Store Systems' technology helps:
Traceability & Transparency: Dark Store Systems allow business owners to configure rules around “proof of work,” including order video and photo recording. This makes it easier to verify claims about damaged or missing items. Video evidence of the packing process ensures that false claims can be addressed immediately.
Pre-Shipping Checks: Orders can be double-checked before shipping, with specific triggers based on the value of the order or the customer’s history. For example, high-value items or problematic customers can be flagged for extra verification(Dark Store Systems - Ma…).
Staff Security and Fraud Reduction: The system incorporates facial biometric authentication, making it nearly impossible for unauthorised staff members to manipulate orders. Serial numbers are also logged during picking, so each product can be traced back to the exact employee who handled it, reducing internal theft(Dark Store Systems - Ma…).
Real-Time Analytics: Business owners have access to live data on order fulfillment and staff performance, allowing for proactive management. These analytics can help spot trends in fraud claims and staff behaviour, allowing businesses to tackle the issue before it becomes more widespread.
Final Thoughts
Friendly fraud is a growing problem for businesses both in the UK and globally. However, with systems like Dark Store Systems, which integrate advanced security, traceability, and real-time analytics into the order fulfillment process, companies can significantly reduce the cost of fraud while boosting internal efficiency. The ability to document and track every step of a product’s journey not only increases customer confidence but also helps businesses hold both their customers and their staff accountable.
Friendly fraud might be on the rise, but with the right technology in place, businesses can stay one step ahead, ensuring that the balance between customer trust and security is maintained.
References:
Fraud Practice report on friendly fraud statistics
UK and global e-commerce market size estimates
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