True fraud occurs when a cardholder’s information is stolen and used to make unauthorized transactions online. Friendly fraud, or chargeback fraud as it is sometimes known, is when a customer purchases a product or a service online, then disputes the seemingly legitimate purchase and claims the money back from their bank using the chargeback system.
The name friendly fraud sounds harmless, doesn’t it? The truth is that in most cases friendly fraud is anything but cordial. In a brick and mortar environment a great deal of these friendly fraud chargebacks would be considered shoplifting or theft. Friendly fraud gets its cheerful sounding name due to the fact that the claimant will seem to be believable and honest.
However, friendly fraud chargebacks are a real pain point for merchants, for several reasons:
- The merchant loses out on the revenue and the goods as the cardholder is not obliged to return the merchandise
- The merchant loses out on the costs of shipping and handling the goods
- The merchant loses out on the transaction costs of the sale
- The merchant must pay a chargeback fee
- The merchant risks being listed as a high risk merchant, which results in higher transaction and processing fees, and may even result in payment services being terminated
- It takes time, effort and money to fight a chargeback
There are several reasons why a customer will initiate a chargeback, some are malicious while others are honest mistakes or even justified.
Unauthorized transaction by criminal elements
In these cases the cardholder’s information has legitimately been stolen and is used by criminals to transact. Chargebacks are designed to protect the consumer from this kind of criminal activity. This is not friendly fraud, but true fraud.
Unrecognized merchant name
In these cases the cardholder will not recognize the name of the seller on their statement or notification. This frequently happens if a merchant bills under a different name to their online presence.
Unrecognized subscription charge
In these cases the cardholder does not remember that they signed up for recurring payments. This often happens when the cardholder signs up for a free trial, forgets about it and does not cancel the subscription before the trial period ends. Or the cardholder does not remember that they have a subscription to the service, this can be especially true if the payment schedules are not monthly but perhaps quarterly, yearly or every six months.
In these cases the cardholder forgets that they made the purchase at all. This can happen if there is a long waiting period for a purchase, such as several months, and it is only billed on shipping.
In these cases the cardholder may have simply inquired about a charge with their bank and the bank initiated a chargeback on their behalf without the cardholder actually requesting it.
In these cases the cardholder is unhappy about their purchase for various reasons, such as it arrived damaged, was never delivered, the incorrect product was shipped or it was not as advertised. Rather than contact the merchant for a refund, the cardholder goes directly to the bank to get their money back. These kinds of chargebacks could be legitimate complaints due to merchant error or negligence, or they could be a misunderstanding on the part of the cardholder as to what they ordered. These types of chargebacks are reduced by good customer service on the part of the merchant.
Merchant non response
In these cases the cardholder may have tried to initiate a return or requested a refund for a seemingly legitimate reason, but the merchant failed to communicate or engage with the buyer at all. If there is no response to queries, or if the customer cannot get hold of the merchant they may file a chargeback out of frustration.
Purchases made by a family member
In these cases a member of the cardholder’s family, frequently a child, makes a credit card purchase without the knowledge of the cardholder. This could be accidental, such as a child making seamless in-app purchases on a parents device, or it could be intentional. After all, children have been stealing their parents’ credit cards to make purchases since the days of mail order. These occurrences are so common they even have their own category name – family fraud.
In these cases the cardholder has requested a refund from the merchant but feels that it has taken too long to take action, so they request a chargeback from the bank believing it will be quicker.
In these cases the cardholder regrets their purchase, but does not initiate a return within the time window for returns as stipulated by the merchant. Rather than accept the fact that they did not return the item in time the cardholder will file a chargeback to try and get their money back.
In these cases the cardholder abuses the chargeback system to try and get goods and services for free. They know that the chargeback system automatically favors the cardholder, and that the merchant may not necessarily fight it. This is friendly fraud in the truest sense, and is nothing more than intent to steal goods from the merchant. The fraudster may try various ruses, such as claiming that the goods were never delivered or that they sent items back for a refund but the merchant never processed it. The real problem is that chargebacks are very easy to do, and cyber shoplifters tend to become repeat offenders.
Chargebacks are designed to protect the consumer. The card associations (for example Visa or Mastercard) have a consumer first policy to protect their customers. They also have to comply with local legislation regarding consumer rights and protections. However, merchants can and should dispute friendly fraud chargebacks when they have clear evidence that they are in the right. They may win a reversal and recover the revenue, and increase their reputation with banks. In addition, the consumer may be educated on the correct use of chargebacks.
Fighting chargebacks, however, is not always an easy task and it can be very time consuming and daunting. Large retailers and merchants may have assigned personnel or even entire departments dedicated to dealing with chargebacks. Small businesses, however, do not have these luxuries. The good news is that there are specialist companies that can assist, and frequently your payment partners will include chargeback services as a value add.
At Baer’s Crest we know that chargebacks are very difficult for small or new businesses. We offer solid payment solutions and excellent advice on both mitigating the risk of chargebacks and contesting them. Talk to us about payment solutions for your online business.