This article was originally posted, by me, on IndyDisplays.com.
Fraudulent chargeback claims have unfortunately become an occasional cost of doing business online in recent years. Large e-commerce corporations have started to factor these unethical claims into yearly costs similar to the way brick-and-mortar stores account for the possibility of theft (also known as “shrink”) while budget forecasting. However, business owners with smaller operations can be devastated by this type of fraud, as dishonest customers can essentially capitalize on the support of their credit card provider to steal thousands.
The sheer amount of money wrongfully stolen from business entities, through what has now been referred to as “friendly fraud”, is shocking. The e-commerce sector is the easiest target, and therefore hit the hardest. In 2016 alone, $4.2 billion in revenue was lost due to unethical chargebacks. In fact, 71% of all credit card chargeback disputes filed in 2016 were classified as fraudulent e-commerce claims.
A major contributing factor to this growing scam is the advocacy from credit card companies in favor of their card-carrying customers. Once a claim is filed, the credit card company instantly freezes the funds associated with the disputed transaction for a minimum of 10 business days. After the funds have been frozen, the retailers are given the opportunity to plead their case online by submitting invoice, shipment tracking records, product photos, email communication with the buyer, etc. However, the credit card companies have final say, and their priority is to protect the cardholder, not the independent merchant. This has created a devastatingly large window of opportunity for consumers to take advantage of e-commerce companies with little to no consequence. Once the credit card provider decides in the buyer’s favor, the funds are returned to the unethical customer, but there is no obligation to send back the product in question. It seems unfathomable, but at the end of the day the merchant often loses on both ends, the funds and merchandise that’s now fallen victim to what has been coined “Friendly Fraud”.
Upon discovering this friendly fraud loophole, consumers are highly likely to continue the behavior. Half of all cardholders that successfully commit chargeback fraud will do so again within a mere 90 days. This reality is putting online business owners between a rock and a hard place, and deterring the growth of small businesses due to the unpredictable risk. Even outstanding customer service doesn’t provide effective protection, as a dismal 14% of customers attempt to communicate with sellers prior to filing a chargeback claim. Online transactions provide a veil for criminal activity, as customers can win a fraudulent claim without ever communicating with the seller. Unsurprisingly, 58% of consumers file their chargeback claims without ever contacting the merchant in question.
When filing a claim, cardholders are required to select from a list of reason codes that describe the type of chargeback. Over half of all claims are filed with the most general reason code, “Fraud/No Authorization”. This code can be interpreted in a variety of ways, ambiguously placing illicit practices onto the merchant that even the most meticulous documentation submission cannot disprove. The second and third most used reason codes, “Products or Services” and “Cancel Recurring Billing” respectively, reflect more specific transaction aspects that are more easily verified by both parties.
Friendly fraud can happen to any merchant, but there are steps to take to protect profits against this corrupt activity. First, sellers should develop an understanding of all reason codes in order to design business processes that avoid practices susceptible to chargeback fraud. Obtaining clear, official authorizations when finalizing orders and handling payment defends against any miscommunications on customer expectations. In addition, merchants must focus on providing high quality customer service to address and remedy any issues swiftly and fairly. This includes ensuring consumers are aware of return and refund policies. Many times, consumers will call their bank or card company when they see an unfamiliar charge on their statement. It is up to the retailer to ensure their company’s charge is accurately depicted on transaction statements to avoid any confusion. Lastly, e-commerce companies must be diligent in keeping detailed records and documentation, which they can provide in the event of a fraudulent claim.
In the case of many credit card chargeback claims, the customer is not always right. Friendly fraud can blindside businesses that are unprepared to dispute the dishonest claims, possibly resulting in the unforeseen loss of hundreds or thousands of dollars in revenue. As more consumers become aware of the opportunity to scam businesses through friendly fraud it is essential for e-commerce business owners to remain diligent on protecting themselves on every transaction.