Chargeback Fraud: How Consumers Use Chargebacks to Commit Friendly Fraud
Fraud, a term most everyone is familiar with and when we think about fraud in terms of payment processing, we usually think of credit card fraud. The classic image of a purse thief using stolen credit cards or a tech savvy thief using a card skimmer to make fraudulent online purchases. However, there is another type of fraud committed everyday by legitimate cardholders! In fact, according to data from eMarketer and LexisNexis , in 2016 ecommerce was poised to lose well over $6.7 billion to fraud.
To learn more about Chargebacks, read our previous Insights on the topic.
Every business is accustomed to dealing with unhappy customers and often times the best course of action is to provide the unhappy customer with stellar customer service and if necessary a refund. In the case that a resolution cannot be reached between the business and the customer, a customer can also issue a chargeback. Chargebacks can be incredibly detrimental to a business with expensive fees, greater scrutiny, and possibly termination of your merchant account.
Though many chargebacks are legitimate, there are chargeback abuses known as friendly fraud. Friendly fraud occurs when a customer issues a chargeback and forces a refund when their complaints about goods or services are not legitimate.
Customers practicing friendly fraud may claim that:
They didn’t order an item
That the item they ordered was never received
That the item they ordered did not match the description
That their item arrived damaged or defective
While all of the aforementioned reasons are legitimate cause for a chargeback, unsavory customers will take advantage and keep the product and force a refund through a chargeback. Though many who commit chargeback fraud do so with nefarious intentions, a portion of these friendly fraud chargebacks are from customers who simply did not want to take the time to get a refund from the business or merchant.
In addition to the damage chargebacks inflict on your merchant account and payment processing relationships, friendly fraud is incredibly costly. In their research on fraud, LexisNexis found that every $1 of fraudulent chargeback losses actually costs businesses an additional $2.40 when all is said and done.
Protecting Your Business from Chargeback Fraud
It is important for your business to take certain precautions in order to minimize both legitimate and illegitimate chargebacks. If you find that your business is on the receiving end of frequent chargebacks, take note of the reasons customers are citing for the chargeback.
If a customer claims that an item did not arrive, use tracking numbers and keep detailed records regarding delivery
If a customer claims that an item was not as described, edit your current descriptions of items with more detail and provide better more detailed pictures and/or video
If a customer claims that an item has arrived damaged, use a different shipper or delivery service
If a customer claims that an item is defective, use different suppliers
Although these steps cannot protect 100% against friendly fraud, it can make it significantly harder when fraudsters make their claims.
Here are some other steps to help avoid chargebacks:
Provide your customers with a straightforward refund policy that is clear, easy to initiate, and uncomplicated. It is always preferable to issue a refund than be on the receiving end of a chargeback.
Subscription based business that rely on recurring billing are prone to increased chargebacks since customers simply forget what they signed up for and don’t recognize the charges. For this reason, we suggest choosing a monthly recurring billing cycle over annual billing. Whether charging in monthly or annual cycles, the best way to avoid chargebacks is to keep in contact with your customers and send billing reminders before the billing date.
During the ordering process, make sure customers provide CVV codes as well as their billing and shipping address.
Keep detailed records, receipts, and documentation to help in your challenge of chargebacks.
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