We know it’s hard to believe, but sometimes even your beloved customers have malicious intentions. According to a newly published whitepaper by Radial, the majority of eCommerce fraud originates from cyber criminals, who use compromised payment data to make unauthorized transactions, and make managing eCommerce fraud extremely challenging. Merchants are forced to constantly balance risk exposure with customer disturbances, heavily invest in fraud detection technologies, and dedicate resources to preventing fraud. However, what happens when the customer is the one committing fraud? Commonly known as “friendly fraud”, this type of first party fraud is when customers transact online, and then claim their purchase was unauthorized. Follow the Rippleshot Team as we quantify how much friendly fraud has been costing merchants (quick teaser- billions), and the steps merchants should take to avoid it.
The Friendly Fraudster
Although most eCommerce fraud comes from criminals using stolen payment data to make unauthorized purchases, there is a growing segment of competition to these hackers, and that is “the friendly fraudster”. Usually customers with unblemished digital risk profiles, friendly fraudsters will pass all fraud screening tests, make authorized purchases, and later claim them as unauthorized. Merchants are already struggling to effectively single out traditional fraudsters, let alone battle disputes with “good customers” who simply decided they do not want to pay for their merchandise, whether it was a premeditated act or a last-minute change of heart.
After ordering and receiving a product or service, usually with legitimate shipping/billing information, the friendly fraudster will call upon the merchant or issuing bank to dispute the charge. In order to substantiate their dispute, they will resort to false claims such as:
- The order never arrived
- The service was never rendered
- The transaction was not recognized
- The transaction was unauthorized
- The goods were damaged
Many times, they will circumvent the bank and go directly to the merchant’s customer service team. Here, there is a high probability of customer service accommodating the request immediately, in order to keep the customer happy. During the process, customer service will generally avoid asking for a return of the alleged damaged goods, and simply ship out a replacement.
What's The Big Deal?
At first glance, friendly fraud might seem like an innocent crime, like pirating a movie, or “slightly” speeding on the highway. However, it is clear that although instances of friendly fraud do not match up with traditional eCommerce fraud schemes, intentionally submitting a false claim for a transaction is indeed fraudulent and illegal. Furthermore, friendly fraud is costly and much more detrimental to merchants than what meets the eye. Consider the fact that merchants lost $11.8 billion to cases of friendly fraud in 2012, and 40% of consumers who have engaged in friendly fraud will do so again within the next 90 days, according to VISA. Also, friendly fraud is quickly evolving in sophistication and scale, as it has risen 41% since 2011. According to the FBI, friendly fraud is one of the top 3 threats to eCommerce, and according to CBS, 86% of chargebacks are linked to friendly fraud.
This Means War
Friendly fraud is quite complicated, as it is virtually impossible for a merchant to validate if a customer’s claim has merit or not. It is easily possible that an honest customer’s order was stolen from his doorstep, delivered to the wrong address, or the order went unrecognized because it was placed by another member of the same household.
The complexities are intensified when considering customers who bypass the merchant and go directly to the payment processor to dispute the charge, which is more common than it seems. Research from Verifi states that 86% of the time, cardholders will not contact the merchant until after the dispute is filed, if they establish contact at all. As a result, the merchant is faced with yet more costs: a labor-intensive process in handling the dispute, and additional losses from chargeback fees imposed by the payments provider.
When chargebacks are involved, merchants brace for impact, because any chargeback activity on a transaction translates to costs for the merchants. These can include acquirer fees, chargeback processing fees, and operational/labor costs.
Once a dispute is initiated by a customer, there is absolutely no guarantee that the merchant will win even if they produce compelling evidence, as processor rules generally favor the customer. Since the burden of proof, and associated costs, are attributed to the merchant, the merchant is responsible for collecting all related information, including address verification, CVV verification, IP address information, product delivery, and confirmation records. Concurrently, they must examine the evidence, dollar value of the disputed charge, and potential chargeback fees, to determine the right course of action, whether it is challenging or accepting liability.
Weapons In The Arsenal
Although the prospect of friendly fraud is grim and convoluted, there are many tools at the merchant’s disposal to fight against friendly fraud, as outlined by Radial.
Merchants must be clear with customers regarding policies and practices, such as billing, shipping, and refunds. Also, email order invoices and product details should be sent immediately after the transaction, along with understandable billing descriptors, so that the customer can recognize the charge, and ultimately reduce the probability of a dispute.
2) Know Your Customer (KYC)
Using chargeback and customer service data, merchants should analyze a customer’s profile and search for abusive claim patterns. When merchants monitor a customer’s claim history/ chargeback data, and watch for customers who are repeatedly filing disputes or contacting customer service for a refund, they can pinpoint friendly fraud and take appropriate action.
3) Stricter Order Processing
For identified repeat offenders, make a signature mandatory for proof of delivery on all future orders. This measure will serve as proof, protect merchants from chargeback issues, and increase the shipping cost for the customer. Merchants can also set parameters around potential friendly fraudsters, such as limiting the dollar value of a transaction.
When dealing with friendly fraudsters who just won’t quit, be prepared to notify customers in writing that no further refunds will be administered due to repeated, unwarranted claims. Also, a merchant can ask that the customer sign an affidavit before processing future orders to absolve the merchant of chargeback liability. However, this countermeasure can lead to resentment on part of the customer, so it is important that the friendly fraud is identified correctly.
5) Chargeback Representment
A merchant’s chargeback team should aggressively fight and refute against chargebacks that show evidence of abusive customer claims patterns. Having representment sends a clear message to the customer and card issuer: the merchant is not liable, and more due diligence is required the next time that customer asks for a refund.
An unfortunate reality is that some customers will go to extremely far lengths to commit friendly fraud. Although it is a time consuming, labor intensive process on the merchant’s part, chargeback representment and disputes are necessary evils, because they prevent friendly fraudsters from exploiting the system. By knowing your customer, knowing when to dispute, and knowing how to dispute, merchants can sidestep friendly fraud.
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