August 19, 2016
Guest Perspective: The Hidden Problem of Friendly Fraud
By Monica Eaton-Cardone, CIO and Co-Founder of Global Risk Technologies, exclusively for CardNotPresent.com
Don’t be fooled by the seemingly benign term “friendly fraud.” To a business, there’s nothing friendly about it, just as in war, there’s nothing friendly about “friendly fire.” In the latter, troops are mistakenly targeted by their own side while in the former, e-commerce merchants are taking hits from the very same customers that their growth depends on. Have no doubt, friendly fraud can blast holes right through any business.
In Europe, e-commerce is growing at close to 20 percent per year—faster than the U.S.—with revenues in 2015 expected to reach $202 billion. In order for this trend to continue, consumers must be able to buy with confidence. It’s also vital that merchants can sell with forecastable and sustainable profits. Yet globally, the actions of “ordinary” consumers are costing merchants $11.8 billion each year in friendly-fraud losses according to Visa, compared to $2.7 billion in identity theft. In 2014, each dollar of fraud cost the merchant $3.08—a figure that’s rising and threatening to overwhelm businesses. To prevent shrinking profits, merchants need to understand this threat, identify wrongfully filed chargebacks and move quickly to mitigate their exposure to additional expense and risk.
As the name suggests, friendly fraud isn’t the work of identifiable criminal gangs and much of it isn’t even intentional behavior. If a family member buys something online but then the cardholder subsequently cancels the payment, that’s friendly fraud. Similarly, a customer’s alarm bells could ring when bank statement details don’t match the retailer’s brand name, again prompting them to request a chargeback even though the product has already been delivered. Not only that, but they also failed to attempt to contact the merchant in an attempt to identify the purchase. A third perfectly innocent situation would be if a customer claims a refund after discovering they missed the opportunity to return unwanted merchandise and succumbed to the temptation of exploiting this rapidly expanding loophole.
While all these are examples of unintentional friendly fraud, there’s also a rising tide of customers deceiving merchants by receiving a product then deliberately seeking a refund through their bank, claiming it was never delivered. This is a particular worry for merchants as 86 percent of cardholders file disputes directly with their bank without notifying the merchant. What’s more, 40 percent of consumers who file a fraudulent chargeback will do it again within 60 days, according to Visa, burdening merchants with rising liabilities and costs.
In all these cases, merchants can not only lose a sale but also the product. Additionally, they face fines from their bank and a negative impact on the statistics card brands use to evaluate their risk. Meanwhile, major payment providers MasterCard and Visa are facing an eroding market share in Europe, with alternative CNP payment options proliferating and many Europeans more likely to use them instead of credit cards than Americans.
Friendly fraud may have grown significantly in recent years but it is not an inevitable part of doing business and e-commerce merchants don’t need to take it lying down. But what can you do? Well, the first thing is… do something . An instinctive reaction to this drip-drip erosion of your profits is that you just have to put up with it. But, that’s simply not the case. Changes to combat friendly fraud don’t necessarily involve additional costs and threats are best tackled early. Simple changes like these can also improve your overall business model:
- Maintain impeccable records – If your records include delivery receipts, then a customer’s claim that they “never got the parcel” is easy to disprove.
- Concentrate on customer service – If customers are unclear about who to turn to when an order doesn’t go as planned, they are more likely to go to their bank. By proactively keeping each customer informed at all stages of the process—from an email confirming the order, to tracking a delivery—it’s more likely they will call you with any problem, reducing the chance of a chargeback. Admittedly, being available to answer e-commerce queries comes with its own set of challenges, as peak times for shopping are outside the traditional nine-to-five. However, attention to social media and email queries along with extended telephone query hours can prevent uncertain customers from demanding refunds.
- Optimize logistics – A lose-lose situation for any merchant is when a payment is refunded only for late delivery. These days, customers expect parcels to arrive within a few days, if not 24 hours. The longer the delay, the more nervous they get. Therefore, any streamlining of your delivery process—be it improved warehouse management or a faster courier—will reduce the instance of customers demanding chargebacks.
While best practices like these will reduce instances of friendly fraud, they can never eliminate them entirely. After all, there will always be someone who sees no harm in receiving the odd “free” product by cancelling payment. However, that’s no reason for your business to passively take these hits.
So what can be done in the event of wrongfully filed chargebacks? Case studies show that more than 50 percent of a merchant’s chargebacks can be traced to friendly fraud. Analyzing patterns in these instances can reduce this figure by highlighting repeat offenders, by showing which chargeback revenue should be reclaimed and by flagging seemingly lucrative transactions that have a greater risk of being fraudulent.
While this sounds like a daunting prospect for your business when you already have enough on your hands, much of this checking can be automated in such a way as to effectively discourage future disputes. Also, there are specialists out there who can advise on solutions and strategies to handle chargeback compliance, risk mitigation and fraud management before they harm revenues, growth or profits.
The measures you take to control friendly fraud can only benefit your business in this expanding market. Satisfied customers served quickly and efficiently are not only less likely to charge back their payments, but are more likely to be loyal to you in the future. It also means you won’t be forced to raise your prices in order to offset avoidable losses. But, this growing problem can only be addressed by actively understanding its causes and implementing positive solutions to it.
Monica Eaton-Cardone is CIO and co-founder of Global Risk Technologies, an international technology firm based in Dublin, Ireland that provides dynamic risk mitigation services to businesses in the payment industry. The company provides solutions for chargeback processing, risk mitigation, and fraud management.