13 April 2017
Selling online has many advantages. You can start your business on a small budget, setting up a store on an e-commerce platform in a few hours with just a payment gateway and some products on hand, and you’re in business.
You avoid many of the inconveniences of having a brick-and-mortar store but there is one you cannot necessarily avoid and that is loss due to shoplifting. When it comes to online sales, shoplifting takes place in the form of friendly fraud.
Friendly fraud is a type of chargeback fraud which involves a consumer making a purchase with his or her card and then asking for a chargeback from the bank after having received the product or service. It is called friendly fraud to distinguish it from fraud committed with stolen cards. The person committing friendly fraud is usually a good customer who doesn’t do this all the time.
Friendly fraud is sometimes accidental. This occurs when a purchaser doesn’t remember or recognise a purchase and requests a chargeback. When the customer is fully aware of having received the product or service but requests a chargeback nonetheless, it is deliberate. 86% of friendly fraud is deliberate.
In cases of dissatisfaction with the product or buyer’s remorse, the customer could contact the merchant to arrange to return the product for a refund. Unfortunately, in up to 50% of cases customers don’t even try to contact the merchant to resolve the issue, instead requesting a chargeback directly with the bank. This means that the merchant is often unaware there’s a problem until their bank processes the chargeback, taking the money out of their account and issuing a fee.
The reasons the customer gives to the bank to initiate a chargeback could include:
In many cases a recurring payment is cancelled by requesting a chargeback.
Sometimes there is no problem with the product or service but the customer simply feels buyer’s remorse.
When a customer is dissatisfied with a product or service the first recourse should be contacting the seller about a possible refund. Unfortunately many customers don’t do this, often because they find it simpler to contact the bank. 81% of consumers who filed a chargeback did so for convenience as it allowed them to bypass the merchant’s return policy or customer service centre.
Friendly fraud is increasing. In Europe friendly fraud increased 41% between 2011 and 2015.
In the US fraud losses increased from 0.68% in 2014, to 1.32% in 2015 and 1.47% in 2016.
One reason for an increase in card-not-present fraud generally is the adoption of chip cards, also known as EMV. As it became harder for fraudsters to commit crime using cards in physical stores, they moved online. The adoption of EMV cards led to increases in friendly fraud of 62% in the UK and 50% in France, Canada and Australia.
Some people commit a fraud which is a combination of online and offline by ordering and paying online and picking up in store, face to face, and then requesting a chargeback. This accounts for 24% of shrinkage (merchandise lost both through damage and theft) in US stores.
It has been estimated that 1 in 300 orders results in friendly fraud.
Chargeback fraud is increasing. This can be for reasons related to the economy. In the year following the global recession alone shoplifting rates rose by 6% and this included a growing percentage of middle-class people. People unhappy to no longer be able to afford the same things turned to shoplifting. Friendly fraud is also called cyber shoplifting or CNP (card not present) shoplifting and has also increased since the recession.
It can be time-consuming to fight the fraud so merchants only contest the chargebacks in 20% of cases. Realising that they are not questioned on their claims, customers may feel free to continue in such behaviour and assume it is acceptable. More than 20% of people who admitted to a deliberate chargeback considered it was okay or they weren’t bothered by it. What consumers may not consider is the cost to the merchants.
As more people learn about the possibility of committing this type of fraud, it is likely to continue to increase.
Friendly fraud is expensive for merchants. Every time somebody commits chargeback fraud the seller loses not only the merchandise but also the cost of delivering the product or service, processing costs and the fee charged by the bank or payment institution for the chargeback. If a seller has too many chargebacks, they can find their relationship with their payment gateway compromised and may be cut off or need to pay a higher commission rate.
This means that $1 fraud costs more than double this amount in reality. In 2015 $1 fraud cost $2.23 but in 2016 it cost $2.40 in the US. The overall global cost is expected to more than double from $2.8bn in 2014 to $6.3bn in 2018. In Europe alone chargeback fraud is estimated to cost 12 million a year.
When merchants do decide to contest chargebacks it is necessary to assemble the proof to give to their bank which then transfers it to the card-issuer’s bank. This can be time consuming which is why merchants often don’t contest the chargebacks, or sometimes, preferring to contact the customers directly. Contacting the customer directly can work in a case of accidental fraud, where the customer just didn’t recognise a legitimate charge. This can occur when a family member used the card or the buyer forgot the purchase and/or the descriptor which appears on the bank statement is not the name of the store but rather the name of the payment gateway.
Unfortunately, regardless of whether the merchant is in the right and has proof, most cases will be resolved in favour of the customer.
Unfortunately merchants cannot totally avoid friendly fraud. There are some ways to keep customers happy to reduce chargebacks, such as by providing exceptional customer service, tracking deliveries and being easy to contact so customers don’t decide to contact the bank directly unnecessarily in case of an issue.
3-D Secure ensures that the customer’s bank verifies the card is in the possession of the cardholder so the customers can’t claim an unauthorised charge. This often involves sending a code to the phone of the customer. There have been some technological advances to prevent fraudsters from using stolen cards. These include having a code on the back of the card which changes frequently or requiring fingerprint or facial recognition when shopping from mobile.
Information sharing has also reduced the risk of friendly fraud by allowing the identification of people who have the habit of committing it. Ethoca reduced fraud by $100 million in one year by sharing information and reduced chargeback fraud by 40% via a collaboration with the Santander bank.
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