What is Chargeback Fraud, or, Friendly Fraud?

November 30, 2018 | Financial Problems | Jessyka Lee

what is chargeback fraud?

The American Dream has long since powered the dreams of citizens with the thought that you can be whatever you want to be, work where you see fit, and absolutely succeed. Some may argue that with the increase of e-commerce, the American dream is now more viable than ever before. But one thing that is never accounted for in this measurement of success are chargebacks – an unintentional exclusion from the preliminary calculations.

Let’s set up a scenario where we have a set of entrepreneurs, let’s call them Jim and Susie Miller, and they break into the eCommerce’s seemingly lowered barriers of entry. As savvy entrepreneurs, they create a distinctive online retail presence and their brand is well represented. Slowly, they gain a strong clientele of people who shop with them, and in time, they have a profitable online business.

While the guarantee of growth with affiliate marketing entices the Millers, what they do not know is that this kind of advertising — if not closely monitored — can attract higher levels of chargebacks. They quickly find themselves ready to really celebrate, when their credit card processor informs them that no cash would be deposited to the business’ bank account for the past week’s earnings because a couple of clients had registered chargebacks. Soon afterwards, the bank closes their accounts entirely.

Many online merchants seek customers through affiliate marketing. The problem is that merchants going into this arena often times lack expertise and schooling in the affiliate area. Without understanding the mechanisms of the technique, one can quickly fall victim to affiliate fraud, and the outcome is excessive chargebacks and the loss of credit card providers.

Fortunately, in this hypothetical case, the Millers are very clever business people who quickly learn from their mistakes and re-invest in their business with new defense mechanisms to ensure such fraud can’t hurt them again. After completing this whole process, I’m sure you can suspect that they are shocked when their chargebacks spike again.

Learn more about chargebacks by clicking here.

what is friendly fraud

Chargeback Fraud, Friendly Fraud, and, The Silent Scam

This time, it was a new kind of chargeback fraud that is considered a “friendly fraud,” and is a scam that retailers never see coming. It is a chargeback filed by a customer who tries to get something for nothing by calling their credit card provider and asserting a card-not-present transaction was fraudulent and unauthorized.

Estimates from experts say that merchants dispute only 25 percent of all illegitimate or friendly fraud chargebacks. And chargeback fraud has exploded in the last several decades, since the mechanics of this scam penalizes merchants who don’t have the time or resources to defend themselves by combating these kinds of chargeback claims. Based on Visa, favorable fraud accounted for $11.8 billion in chargebacks in 2012 alone — six times the estimated $2 billion in reductions caused by identity theft.

Countless retailers have fallen prey to chargebacks from friendly fraud, despite every intention of growing their companies the ideal way. Empowered by the development of new trade channels and also the “customer is always right” adage, more consumers are filing chargebacks and benefiting from what is comparable to internet shoplifting. And the consequences will continue to be lenient until more merchants take a stand.

The only defense against chargeback fraud and friendly fraud is a fantastic offense.

Employ best practices: deliver fast response times in customer service needs, offer extended service hours, keep delivery receipts for concrete products, specify refund and cancellation policies clearly, use a crystal clear charge card descriptors, and promote high-quality products at fair prices.

Establish policies for monitoring identity theft and affiliate fraud: review traffic, survey customers, utilize fraud detection software, and take advantage of pre-notification alarms. And dispute illegitimate chargebacks, either in house or through a chargeback fraud management company.

With the speed of delivery increasing to meet the demand for instant gratification, there’s absolutely no time to wait for processes to choose their course. Merchants have to struggle to remain afloat in this business. And protecting businesses from credit card chargebacks is a endless struggle.

November 30, 2018 | Financial Problems | Jessyka Lee