Friendly Fraud Surges in Wake of Ecommerce Security Breaches

Mar 24, 2014 12:50 PM  By

online-fraud-300Recent data breaches experienced at large-scale retailers such as Target, Neiman Marcus and Michaels have raised consumer awareness on protecting financial identity, but have also opened the door to an increasing number of friendly fraud chargebacks by consumers who use the mishap as an opportunity to obtain a refund for valid purchases, according dispute mitigation company Chargebacks911.

>A friendly fraud chargeback occurs when a consumer makes an online purchase with his/her own credit card, and then instigates a chargeback through the card provider after receiving the goods or services, effectively canceling the transaction and receiving a refund of the money.  If the merchant fails to dispute this chargeback (which is often the case), the consumer ends up getting the goods or services for free.  The merchant is charged a fine for each chargeback, and if the chargeback relates to an online transaction, the merchant is automatically adjudicated as guilty and must dispute the consumer’s accusation by filing its own case to attempt to win back the transaction value that was temporarily provided as a refund.

According to Chargebacks911 co-founder Monica Eaton-Cardone, her company sees this type of fraud spike during large-scale security breaches, which she attributes to two things:  consumers’ increasing education about identity theft; and using that knowledge to initiate a chargeback, claiming that someone stole their identity to make a purchase, rather than admitting to buyer’s remorse or attempting to get a product or service for free.

“When there are no costs or risks associated with filing a chargeback, compounded by well-publicized high-profile security breaches and many issuing banks providing a hyperlink to its online banking statements whereby a consumer may file a dispute with merely the click of a button, it’s not rocket science to understand why friendly fraud has become so pervasive,” Eaton-Cardone said.

When merchants fail to dispute chargebacks, they incur fines of up to $50 for each instance. This is coupled with the fact that processors do not make money on merchants fighting chargebacks (some have even added fees when a dispute is defended, on top of the advertised chargeback fee), but remain to profit from merchants receiving chargebacks.  In fact, hefty mark‑ups are made by middlemen and the processors—sometimes upward of 200% of their actual cost from their acquirer.

A high number of chargebacks results in the merchant losing his/her merchant-processing account, thus effectively putting an Internet-based company out of business.  Eaton-Cardone maintains that consumers are inadvertently threatening ecommerce by failing to understand the ramifications of friendly fraud.

Eaton-Cardone advises merchants on the proven offensive tactics that they can take in order to protect themselves:

1.  Handle customers in a more personal manner, and attempt to resolve account issues timely.  This increases consumer satisfaction, lessening the chances of consumers seeking help from their banks.

2.  Require a signature upon delivery of goods.  The signature, in addition to information gathered online, helps clear merchants of any wrongdoing in the resolution of friendly fraud disputes.

3.  Keep customer records and account histories.  Doing so helps to track suspicious activity, and lowers the risk of accumulating chargebacks.

For merchants currently struggling with increasing chargeback issues, Eaton-Cardone suggests seeking the help of an expert in the field who can:

1.  Analyze the real cost to the merchants business;

2.  Obtain competitive and diversified high-quality processing;

3.  Mitigate losses from friendly fraud;

4.  Establish fraud and risk management tools to detect fraud and abusive consumers; and

5.  Reduce merchant errors and develop best practices.

While eliminating “friendly fraud” entirely is not absolute, the above industry best practices will limit merchant risk and help to curb future chargebacks.