'Friendly fraud' is coming for small businesses

Actually, yes. At least that’s what I learned while writing today’s newsletter.

In July, Bloomberg Businessweek published a great piece about the rise in chargebacks. They’re up 29% in the U.S. from 2021 to 2025, according to data the article cites from Juniper Research. 

Chargebacks happen when someone disputes a payment with their bank. They might do this because they don't recognize a transaction or they received a defective product they can't return, for instance. 

Chargebacks are a powerful consumer protection tool. They’re the reason you can get fraudulent transactions reversed if your credit card gets stolen. 

But when I dug into the Juniper Research report further, I was surprised to see that 21% of e-commerce chargebacks were so-called “friendly fraud.” That’s people disputing transactions for stuff they ordered on purpose. 

They might think the product wasn’t as described or accidentally missed the return window. Or they might have always planned to file a chargeback. The report says some shoppers see it as a kind of “victimless crime.” 

We could debate whether that's the case with an Amazon or a Walmart. But small-business owners face rising numbers of chargebacks too. If it happens to you, you’ll have to take time to prove that a sale was actually legit. Even if you win, you’ll owe fees. Have too many chargebacks and you can face fines. Or worse, your payment company could drop you and force you to scramble to find a new one. 

So I set out to learn what you can do to stop chargebacks. You can implement some controls that limit totally fraudulent purchases. And you can improve your communication with customers in ways that hopefully prevent some — or at least give you the evidence you’ll need to fight them and win. 

My supermarket shows up on my credit card statement as a combination of letters and numbers. It looks more like a license plate number than my local Jewel-Osco. If I didn’t shop there every week, I’d have to stop and wonder if it was fraud.

That license plate-looking name is the location’s “billing descriptor,” explains Michael Rangel, founder of online business banking company Novo. 

You can control what shows up there via your merchant accounts.

If you’re not sure where to find your billing descriptor, call your merchant account provider (probably the same as your payment processor). If the name isn’t what you expect, you can file a DBA (“doing business as;” here’s how) and add it.

Your payment processor probably offers some sort of service that flags potential fraud. (After all, they don’t want to deal with cancelled transactions either.) In general, these services flag users with histories of trying multiple cards, disputing purchases or other behaviors that might signal abuse.

A few offerings from major players:

Chargebacks can occur when a customer thinks you’re not acting in good faith. You can try to beat some of that by telling them as much as you can about the product. Think real photos (not AI-generated images), clear explanations of rules or procedures and detailed measurements.

The customer might not read it. And they might file a dispute anyway. But if they say the product wasn’t as they expected, for instance, you can use all these details to prove that they should have known better. 

It’s conventional wisdom that the easier it is for a customer to buy something, the more sales you’ll make. But that means more returns, cancellations and chargebacks too.

Surge, a property management firm that handles vacation rentals, recently started verifying customers’ identities after they book reservations. 

It has caused more cancellations upfront, founder Humberto Marquez told me. (Most people aren’t used to a message asking for a copy of their license when they rent an Airbnb.) But he suspects it might also mean fewer purchases made with stolen cards, plus fewer “friendly fraud” disputes later. 

Marquez is waiting for 12 months of data to decide whether guest verification has been a success. But so far, he thinks it’s reducing the impact of fraud.  

Anthony’s, a Florida boutique that sells women’s resort wear, sends every new customer an email after their first purchase. It thanks the buyer and acknowledges that the family-owned company can’t ship as fast as Amazon, but says real people pick up their phone.

Kristin Anthony, the brand’s director of e-commerce, thinks this opens the door for customers to reach out if they have a problem or question. 

A majority of recipients open it.  And “I probably get two to three replies per week just to that email,” she says. 

Both Marquez and Anthony told me they’ve won chargeback disputes. It isn’t an easy process. 

The customer has to give a reason for disputing a transaction. These can include not recognizing the transaction, seeing an incorrect amount billed, never having received their goods or receiving defective products.

To win the dispute, you have to provide evidence to counter the customer’s story. That can include: 

“We do win a large majority of our chargebacks due to the information we provide,” Anthony told me.

Getting all of that together is time consuming, and of course time is money. Consider this when you’re choosing an e-commerce platform. Table stakes: a platform that automatically sends confirmations, updates and receipts and associates them with a customer’s email address. 

Cash flow is famously tight for small businesses. Chargebacks are especially tricky because card issuers can actually claw funds back after they’ve been disbursed. Money that was in your account today could be gone tomorrow.

Even if the disputed amount is small, that “may not matter as much as whatever was lined up behind it,” Novo’s Rangel says. “Now [the business owner is] in overdraft. Now their next bill isn’t going to clear. And if all of these dominoes fall at the same time, it puts them in a super bad spot.” 

Ideally you’d always have a cash cushion. But if that isn’t possible, some e-commerce platforms offer chargeback protection. For instance, Shopify covers the cost of chargebacks on its checkout service Shop Pay if the buyer reports the transaction as fraud or a mistake. (Protection doesn’t apply if they say you misrepresented the product, though.) 

Randa Kriss found and shared this grant opportunity. 

Need help with your latest tech or operational challenge? Applications open Aug. 15 for Shophand’s $5,000 Small Business Boost Grant. The grant awards $2,500 in cash plus $2,500 of Shophand services. Those may include:

To qualify, you’ll need to be an actively operating U.S.-based business that has fewer than 50 employees. You must also generate under $5 million in annual revenue and follow Shophand on Instagram, X, LinkedIn and Facebook.

Click here to learn more.

To apply, you’ll need to create a free account with Shophand. You’ll have to describe your biggest challenge and explain how Shophand could support you. Applications are open from Aug. 15 through Dec. 1. The winner will be announced on Dec. 15.

If this one’s not a fit for you, check out this list of 50+ small-business grants. I regularly update this page with new opportunities and upcoming deadlines.

Ryan Lane, who edits Starting Small, wrote this update.

On Aug. 6, the IRS announced a number of updates for Business Tax Accounts. (That’s what the agency calls the place where you can access your business’s info online.)

The most notable improvement: The IRS now lets you get a copy of your EIN online.

An EIN, or employer identification number, is like a Social Security number for your business. The IRS requires companies with employees to have an EIN to file taxes. But other businesses can get one too. We recommend doing this since it’s fast and free. Plus, an EIN draws a line between you and your business, among other benefits.   

The problem? The IRS historically hasn’t made it all that easy to look up your EIN. 

For instance, it shows you the number once when you apply for it online. That’s it. If you didn’t save it at that point, sorry. You’d have to unearth it from other documents, like a business account application. Or you could call the IRS. 

(As I write this on a Tuesday at 10 a.m. ET, the estimated wait time to talk to an IRS business tax rep is about an hour. The rest of this chart isn’t inspiring either.)    

Online EIN access is a long-overdue add for business owners. You might not need that number more than a couple times a year. But when you do, now you won’t have to scramble to find it.  

There are other nice changes if you have a payment plan for owed taxes. Previously, you might have to call the IRS just to find out its balance. Making an electronic payment meant using a different government service altogether (via the Treasury) in some instances. No more. Businesses can now do all this through the IRS website.