How Fraud Affects Merchants

Chargeback Fraud: The Unscrupulous Cause of Profit Loss

Chargeback fraud (commonly referred to as friendly fraud) results when the cardholder contacts the bank to inaccurately report a legitimate charge as fraud.
These are the most common reasons consumers perpetrate friendly fraud:

  1. The customer regrets making the purchase and thinks filing a chargeback is less bothersome than obtaining a traditional refund.
  2. A family member made the purchase, but the primary cardholder doesn’t want to authorise the transaction.
  3. The original intention was to get something for free.

The Real Cost of Friendly Fraud

If you were to compile all your friendly fraud chargebacks and carefully analyse what’s been happening, here is what you’d find:

  • In 2012, friendly fraud accounted for €11.8 billion in profit losses.
  • In 2015, revenue lost to fraud reached an all-time high of 1.32%–a 94% jump from the previous year.
  • With each chargeback filed, the merchant loses much more than just profits. When fees are added in, you can expect to lose between €2.69 and €3.34 for each euro of fraud.
  • Close to 90% of all cardholders contacted the bank for a chargeback before requesting a refund from the merchant. Think of how many chargebacks could be avoided if they just called you first!
  • Once a consumer files a chargeback, he or she is nine times more likely to do it again. That’s why the average business receives 133 successful friendly fraud chargebacks each month (a 46% increase in the last year).

Profit losses caused by fraudulent chargebacks are just the tip of the iceberg. Any merchant that receives too many chargebacks can lose the ability to process credit card transactions, which essentially causes the death of the business.

Why Consumers Commit Friendly Fraud

Traditional fraud is instigated by money-hungry criminals. With friendly fraud, the villain is less obvious.
Those who commit chargeback fraud are usually part of a more affluent population. They are the people who work long hours, are constantly multi-tasking, need to travel regularly, and basically “don’t have time.”
Often times, these consumers are just looking for someone to take care of the situation for them. They reach out to the bank, and the bank ultimately files a chargeback on the consumer’s behalf. This makes the consumer believe it is a viable no-hassle solution.
The rise of friendly fraud is directly proportional to the rise in ecommerce sales. More transactions means more chargeback opportunities.
Between 2012 and 2014, the number of ecommerce sales increased by 40 million. By 2018, there will be about 1 trillion additional transactions.
Not only are consumers making more purchases, they are spending more. This could account for the elevated level of “buyer’s remorse.”

  • When a consumer uses a credit card to make a purchase, the total amount is 12-18% more than if they had used cash.
  • The average credit card transaction is €87 and total credit card activity hovers around €890 each month.
  • The average household has almost €15,800 in credit card debt.

Take Control of the Situation

There are various chargeback prevention techniques specifically designed to deter friendly fraudsters. There are also chargeback dispute steps to take if you suspect the customer is acting fraudulently.
Implementing these prevention and response strategies takes a significant amount of time, knowledge and effort. If friendly fraudsters are threatening the longevity of your business, it might be time to call in professional help.
Contact us for a free chargeback analysis. We’ll help you identify the ways chargeback fraud is slipping through your defenses and create an offense to address those threats.