Working in risk management comes with a certain amount of difficulties (to say the least).
But when the cardholder is in fact the perpetrator – it only gets more complicated.
With the pandemic forcing more consumers to turn to eCommerce, the issues of friendly fraud and chargeback fraud are more prevalent than ever before.
So let’s dive into the differences between the two, why the subject is still such a problem for merchants and how to fight chargeback fraud.
In a nutshell, chargebacks are simply reversed transactions where the customer has requested a refund from the issuing bank in regards to a purchase made.
Chargebacks are ordered by the issuing bank sometimes due to an error that has been discovered or when a client has contacted the bank to dispute a transaction.
The process can be quite laborious as claims require a receipt or proof of transaction and for a vendor to dispute the claim certain steps need to be taken.
When a chargeback is initiated by the issuing bank, then the issuing bank facilitates the chargeback through communication on their processing network.
Upon confirmation from the vendor, its acquiring bank will authorise the fund request and then charge a fee to merchants for chargeback transactions, detailed further on.
As a form of credit card fraud, it then falls into three categories: friendly fraud, chargeback fraud or true fraud.
Chargeback fraud is the act of a customer purchasing an item then contacting their credit card issuer / bank to dispute.
Focused on payments that have been processed and settled, chargebacks often take several days for full settlement due to the multiple parties involved.
For a merchant, keeping their chargeback ratio low is vital to maximise profitability as some cases of chargeback fraud can be attempts to secure an order without parting with any money.
In essence, this is the act of theft in an online shopping scenario however there is no CCTV for when a transaction is made online which can lead to confusion and cases of friendly fraud…
As with everything, there are times when a genuine mistake has taken place and in this instance friendly fraud occurs.
Whilst in principle both acts are disputing the same transaction in the same manner, friendly fraud acts as the most ‘honest’ version.
Often, friendly fraud has happened because of an honest mistake on the customer’s part or that there was no direct involvement from the cardholder.
Some instances of friendly fraud include:
Unintentional Friendly Fraud
When a customer makes a purchase but requests a refund from the bank due to either not recognising the transactions in their bank account or forgetting it entirely.
Intentional Friendly Fraud
An act of genuine fraud, here a consumer makes a purchase knowingly but still requests a refund from the issuing bank.
The issue lies with the merchant in this instance with a range of possible reasons such as lack of descriptors on a bank statement, missing products, delivery issues etc.
Shared Card Fraud
Often within a family scenario, unauthorised purchases are made with a card that is not directly administered by the cardholder i.e. a child buying in-app purchases for a mobile game using their parents card.
Policy Abuse Fraud
Given the demand from consumers for a seamless returns policy, some buyers will abuse a merchant’s availability of refund requests.
The key differentiator comes from the intention of the buyer; in chargeback fraud, the cardholder is operating under malicious intentions and is looking to purposefully commit fraud against the merchant.
An example of this would see a cardholder authorise a card not present transaction for an order online then file a dispute on the payment in an attempt to get their money back as well as their goods for free.
Friendly fraud sees the person in question often make an honest mistake as mentioned previously.
When a customer bypasses the merchant’s refund policies to go directly to a bank, a chargeback fee is assigned by the acquiring bank to cover any of the related costs.
A merchant typically has 45 days to dispute a chargeback, however, the process can be tedious since the cardholder has the upper hand unless you have specific evidence.
For merchants, keeping their chargeback ratio as low as possible is imperative to ensure maximum profits.
Furthermore, the cost of shipping the original item has to be factored in with other operational costs that only build up with each chargeback.
Given the number of transactions dealt with each day, chargeback fees were set up to help protect the consumer and ensure that any dispute puts them in the leading position.
If the payment is disputed and the bank issues a chargeback, money is automatically taken from the merchant’s account to cover the administrative expense of refunding a customer’s money due to a chargeback request.
In a single transaction, a merchant could lose the same amount as the item originally sold, with chargeback fees ranging from 15% to 40% of the payment issues. This is on top of any operational costs, customer acquisition costs and transaction fees that have already taken place.
A major issue in separating the two cases is that from the position of an anti-fraud system, both of these transactions will look clean as the buyer has physical access to the card and often is the same person ordering.
Both make up a high percentage of chargebacks and are often coupled together due to the complex nature of the situation.
Fraud prevention systems find friendly fraud hard to spot since it’s committed by legitimate customers doing legitimate transactions.
There are no patterns to spot, no way to detect malicious intentions, it sometimes comes down to a matter of ‘your words vs mine’.
Another key issue is the lack of awareness from the consumer of chargeback fees. A recent study by Expert Market revealed that 81% of cardholders have filed a chargeback out of “convenience”.
The consumers’ preference for convenience and lack of situational knowledge ultimately means that merchants are facing further losses to revenue.
How to Detect Friendly Fraud?
Often a customer who intentionally commits chargeback fraud will avoid all parties involved for as long as and when caught, will fight to the death to keep their story alive.
With friendly fraud, customers are often more honest with their approach and look for the best resolution with the merchant in question.
Despite being in a lesser position when faced with a dispute, merchants can take several steps to combat chargeback fraud and minimise risks to your business from the outset.
Attempting communication with the customer in question is the first step as you can understand from here whether it was chargeback fraud or friendly fraud; treat it also as an opportunity to gain insights into the customer experience.
With automated live reverse social media lookup, a merchant can combat the issue in two other ways:
- If the data provided by the customer is investigated via a social media lookup tool and it returns a different person than the name on the card, you can then ask for further verification, such as signing an authorisation document, or a face + ID selfie.
- Incorporating social media lookup details in the chargeback dispute process might make the bank lean towards your corner, results dependent.
- While a cardholder can claim that the transaction was unauthorised, if a merchant can prove there was no attempt to resolve the issue from them despite the fact that the invoice was delivered to their personal email, there is a better case to make that they weren’t acting in good faith.
Typically there are two models of interest favoured by merchants: micro fees and chargeback guarantee.
Key Takeaways: Friend or Foe, Remember You Can Always Say No
Blacklisting is the worst-case scenario in any instance but if a customer continues to cause damages due to revenue due to chargeback fraud; perhaps it’s the best option.
Nevertheless, most of the time you can implement effective chargeback prevention solutions that mitigate risk without impacting the frictionless user experience that merchants desire.
At SEON, we believe merchants can take command of the chargeback processes by integrating social media lookup into your KYC + transactions, backing up your verification processes as well as your chargeback disputes.
Read our case studies working with both the crypto (CryptoCoin.pro case study) and marketing software (E-goi case study) industries to decrease chargeback fraud.
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Bence is the co-founder and COO of SEON whose vision is to create a safer online environment for merchants in high risk verticals.