Your Best Customer or Worst Nightmare? The Truth about Friendly Fraud
Unlike criminal behaviour where someone breaks into a business and steals merchandise, or hacks into an account, stealing identities and funds, friendly fraud occurs when apparent legitimate customers initiate a transaction and then process a chargeback.
Often, merchants have no idea that their ‘best customer’ is really their worst nightmare, costing the company hundreds of dollars in merchant services fees and lost revenue. Understanding friendly fraud and chargeback fraud can reduce merchant liability, increase profitability and protect the merchant account.
Developed as part of a plan to protect consumer rights, there are legitimate reasons for a chargeback to be issued. In place to protect consumers from unscrupulous merchants, it provides consumers with the means to dispute charges that have been initiated incorrectly and have not been corrected by the merchant.
The intent of chargebacks was to handle claims such as:
- The item was not delivered. This can include shipping issues, such as when a product doesn’t arrive as promised, or when an item is never received at all.
- The product was defective or damaged.
- The transaction was unauthorised.
- The disputed transaction was a recurring payment that should have been cancelled.
While these are valid reasons for disputing a transaction, the reality is that a growing number of consumers will fraudulently use the chargeback process for their own gain. Often, consumers will claim a valid reason for the chargeback, triggering a credit to their account, while the reason may be a little more nefarious.
Fraudulent reasons for chargebacks include:
- Buyer’s remorse
- Family member made the purchase
- Forgotten purchases
- Missed return window
Decoding Chargeback Growth
There are multiple reasons why chargebacks have become increasingly common, leading to skyrocketing rates of friendly fraud.
- An ineffective coding system has made issuing chargebacks both too easy and too complex. Each chargeback is assigned a code, based on the reason given for the chargeback. A lack of understanding by banks and merchants has given way to a blind acceptance of the chargeback without further investigation.
- Technology changes quickly, allowing criminals to stay one step ahead of fraud detection methods. In an effort to protect consumers from legitimate fraudulent activity, banks have promoted a ‘no-fault’ policy for consumers who claim unauthorised transactions. The overwhelmingly high rates of compromised or stolen accounts have provided criminals with an easy cover: they can steal merchandise while using their own credit cards.
- Consumers have quickly realised that claiming a chargeback eliminates the hassle of making a return. No waiting in lines, no receipt necessary. A simple call to a credit card provider removes the problem. For busy consumers, this seems like a win-win.
- Banks have not implemented procedures to verify chargeback claims. In an effort to keep their customers satisfied, they have adopted the retail mentality of ‘the customer is always right’. By offering ‘no fault’ fraud protection, customers are not held liable for unauthorised charges. Without effective means to verify valid chargeback claims, the bank simply process the claim.
- Disputing chargebacks can be costly and inconvenient for merchants. It requires time, money and effort to investigate and verify purchases in order to dispute a chargeback claim. Many merchants simply accept the chargeback as a cost of doing business, not realising the long-term consequences of repeated chargebacks.
Preventing Friendly Fraud
Despite the growing number of chargeback claims, many chargebacks can be prevented with a few simple steps.
- Developing and implementing best practices in sales transactions is the first step in preventing friendly fraud and chargeback fraud. Creating a training program to ensure that all sales personnel are aware of sales procedures, purchase and return policies as well as documentation processes is vital to preventing fraud.
- Employing the latest in sales technology features is another essential piece of the prevention process. Updating credit card terminals and sales software to include the latest security measures will give the merchant the most current technology resources available to fight fraud.
- The growing ecommerce marketplace has given criminals access to new opportunities for fraudulent activity. By monitoring digital sales and downloads, businesses can better document digital transactions.
- Documentation through the Address Verification Service (AVS) and card security codes are additional methods merchants can use to prevent card-not-present chargebacks.
- Offer top notch customer service. In any business, customer service is a key to developing and maintaining strong customer relations. It can also be a means of fraud prevention. Establish processes to keep customers informed during every step of a transaction. Notify the customer of shipping dates, expected delivery or delays and follow up with delivery confirmation. These simple steps can eliminate many chargeback claims.
- Refuse transactions from known fraudulent customers.
Establishing effective prevention systems equip merchants to deal with friendly fraud and chargeback fraud without fear. With verifiable evidence showing false claim: delivery signature, shipping tracking, or proof of customer’s possession of item, the merchant can dispute and win against illegitimate chargebacks.
Banks are pre-disposed to assume the merchant is guilty, and failing to file a representment only serves to confirm the bank’s opinion. By fighting every friendly fraud chargeback, the merchant sends a clear message to banks and customers.
Resources are available to support merchants in their fight against friendly fraud. Take advantage of these to reduce chargebacks, initiate change within the marketplace and increase profitability.