In 2012, e-Commerce merchants lost more than $11 billion worldwide through debit and credit card fraud. Think about that for a moment… $11+ billion! That’s a lot of money. Among the fraud committed, “friendly fraud” is at the top of the list. Although it may sound non-threatening, it is anything but; in fact, there is nothing friendly about this type of fraud, which is also referred to as “chargeback fraud”.
What is “Friendly Fraud”?
Most of the time, friendly fraud occurs during Card-Not-Present (CNP) transactions, such as online purchases. To break it down, consider this scenario: a customer visits your web store to buy a brand new tablet. They find what they are looking for, follow the steps to pay for their tablet by credit card (either directly through the merchant or through a third-party payment processor), and leave the store happily with their purchase which will arrive on their door step in the next week or so. But when the customer receives their goods, they have a change of heart… about the money they paid. He decides that he deserves this tablet free of charge because why not? He calls his credit card company and files a complaint stating that he was charged for a tablet he never bought or received, and says he has fallen victim to fraud. The credit card company sides with him, as they usually do, and refunds him his money. This customer got his tablet without having to pay for it, leaving the merchant with a bigger loss than just the price of the tablet.
As you can tell from the above scenario, friendly fraud is committed by the customer after they have “paid” for the product. Merchants can dispute, but this does not change the fact that every time a customer does a chargeback, it hits their merchant account hard, raising fees because of the increased fraud risk in their customer base. Furthermore, getting involved in a dispute is draining and labour-intensive, with little return for the merchant.
Who is affected by chargebacks?
The people committing this form of fraud might not realise who they are affecting when they call their credit card provider for a deliberate chargeback. Yes, the merchant is negatively affected, losing money and products, but there are other casualties. Every time a customer commits friendly fraud, the seller’s merchant account becomes riskier, incurring a higher operation cost. This translates into higher fees and more money spent on fraud prevention measures; according to a study conducted by Payments Journal in 2012, retailers spend about $6.47 billion annually on fraud prevention measures. Because of these higher operation costs, the price of the products and services for sale in the seller’s web store increase. This affects other customers – regular people just trying to buy something they want or need for themselves or someone else.
Trustev, an e-commerce anti-fraud company, found that of the 5.1% of people who reported that they have committed friendly fraud, 20% stated that it “didn’t really bother them”. This is upsetting not only because of the fraudsters’ destructive sense of entitlement and lack of empathy, but also because they can often be stealing money from small to medium-sized businesses and from fellow customers rather than from big faceless corporations.
What can you do to combat friendly fraud?
Although it might prove impossible to fully prevent chargeback fraud, you can still take measures to decrease its potential for damage.
Leave a paper trail
In the event that a customer commits friendly fraud, whether deliberately or not, you will have an easier time disputing the chargeback if you can prove that the transaction was authentic. This includes having a record of the transaction with shipping tracking (if your product is not electronic).
Use fraud prevention software
A good software program that matches billing and shipping IP addresses can help you argue your case if you ever have to dispute a chargeback with your banking or payment processing partners. You can also use software that detects the use of hidden proxies (used when customers are trying to hide their IP address for the purposes of fraud and other criminal activity).
Require a card security code upon credit card purchase
A card security code (CSC), also called a card verification value (CVV or CV2) or card verification code (CVC), is a code that the customer enters to authenticate and authorise the transaction. Requiring this as part of the checkout process could not only prevent fraud of various kinds, but also provide you with proof that the customer most probably willingly made the purchase.
Makes returns and refunds easy
Not all friendly fraud is intentional. Some people are just not satisfied with the product. Some folks may have forgotten about the purchase. If you have a dispute resolution process in place, make sure it is efficient and timely so that the customer feels confident in your ability to resolve the situation.
Friendly fraud may exist, but it doesn’t have to be one of your problems. Taking the time to learn about it, how it can affect your business and how to prevent or manage it is a proactive solution that could save you a lot of headaches in the future. For more tips on securing your e-commerce business, subscribe to the DalPay Blog and follow us on Facebook and Twitter.