The FBI listed “friendly fraud” as one of the top threats to card-not-present commerce. The credit card industry estimates that, in 2013, friendly fraud accounted for more than $40 billion in losses. As consumers continue to increase spending over the phone and Internet, the problem continues to rise. From 2011 – 2014, friendly fraud grew by more than 40%.
What is Friendly Fraud?
Friendly fraud is what happens when a consumer makes a purchase, where nobody saw them in person (by phone or online) and received the merchandise or service, and then got a refund from the bank. The refund comes because of a chargeback, 86% of which are fraudulent.
This is a sensitive issue for retailers. While they want to live by the mantra of “the customer is always right”, more and more they realize that many customers are simply stealing from them – not so different from shoplifters. The chargeback process was put in place to protect consumers and to streamline returns when consumers file a complaint about a bad transaction. The pendulum has swung far to the advantage of the consumer, where the merchant is assumed guilty until proven innocent. They are not afforded the opportunity to prove that the consumer willingly purchased something that they indeed received. Instead, the money is returned to the consumer, the merchant is charged a non-reversible fee, and they likely won’t regain the product back in their possession. The consumer is out nothing.
Since the steps for investigating a chargeback are tedious and labor-intensive, most merchants don’t bother with them, especially for lower-cost items. And with the growth of card-not-present purchases, there isn’t all the time to do the due diligence. All this makes friendly fraud easy to pull off. Incredibly, consumers often commit this crime without malicious intent. They simply believe that it’s a faster resolution to go the chargeback route. They don’t understand that contacting their bank instead of the merchant for a refund is not the same thing. Nor do they understand the negative consequences for the merchant.
Winners and Losers
Consumers have little or nothing to lose except time to file. With smaller purchases, it’s likely the chargeback won’t be disputed. They keep the product and get their money back. Consumers are winners.
Banks gain money from chargebacks through processing fees. If the chargeback is disputed, they collect more fees. They welcome fraud claims from consumers and are quick to resolve them with refunds. In-fact, chargebacks represent a significant income stream for banks, which is why many of them now facilitate and/or make it easy for their card holders to file a dispute online, without having to speak to a bank representative. That increases margins for banks, reducing their cost to process chargebacks while almost encouraging more of them to be filed. Banks are winners.
Merchants? They lose the amount charged to the card, fees paid to the bank, time expended on disputes, and often the product or service they provided to the consumer. Even if the merchant wins the chargeback dispute, it is not a happy ending. The merchant still pays the fee, expends time for the research, and gets one chargeback closer to paying higher credit card fees or possibly losing their merchant account altogether. Merchants are the big losers.
So how do merchants protect themselves from these new-age shoplifters while still providing great customer service? There is no perfect solution, but there are two strategies.
First, merchants should educate and encourage their customers to use their easy return policy. While some consumers will still take an unfair advantage, at least the merchant will avoid the bank fees, “dings” on their record, and increased credit card fees. They will lose the sale, but they’ll often get the product returned for restocking. Most important, they’ll win with the consumers that are not purposely stealing.
Second, merchants who deal with larger transactions should create and retain “compelling evidence” for disputing invalid chargebacks. More important than winning chargeback disputes, notifying customers of their “compelling evidence” helps dissuade friendly fraudsters such that they go after lower hanging fruit elsewhere.
For telephone transactions, products like SecureCall from KomBea can help. With SecureCall, the customer enters their card details using their phone keypad – without the call center agent ever seeing or hearing these. Soundboard Software delivers a pre-recorded disclosure that requires the customer to verify that they understand and agree to the charges. Finally, SecureCall immediately emails or texts “compelling evidence” to the customer.
Fraudsters prefer the ambiguity of a verbal discussion over the phone. Using SecureCall, merchants frustrate fraudsters from attempting a chargeback or even transacting in the first place, while honest customers appreciate the merchant’s efforts to protect their credit card data.
The burden is on the merchant to prove that the consumer knowingly purchased and subsequently received the product or service. While winning disputes doesn’t eliminate the fees or “dings”, it most often results in regaining the product and the money the customer originally paid. Most importantly, it deters friendly fraud.