Retailers who conduct business online face a multitude of challenges. While their reach can be global and their convenience an incentive, the separation from the customer can present new risks. Apart from sales, security is arguably the most important aspect of running an online business. Cyber security breaches and criminal fraud are most likely already on their radar, but what some e-commerce merchants don’t know is that there are security risks where they least expect it: their own customers are often committing fraud.
Background on Chargebacks
How are customers stealing from online retailers? They’re manipulating the chargeback process and getting away with it.
Chargebacks—which were designed as a tool to protect shoppers from dishonest merchants—occur when a credit or debit cardholder requests a refund from his or her card issuing bank, instead of the merchant itself. In a traditional refund, the merchant has the ability to reverse the charge and return the money to the cardholder. In a chargeback case, however, the merchant must not only return the funds, but pay what is known as a chargeback fee, unless they are able to prove to the card networks, as well as the issuing and acquiring banks, that the sale was valid and authorized.
When used appropriately, chargebacks allow cardholders to receive refunds when they are victims of credit card fraud or when a deceitful merchant has taken advantage of them. When they are misused, however, the merchants are the ones being taken advantage of.
What Is Friendly Fraud?
Friendly fraud, commonly known as chargeback fraud, is a form of cyber shoplifting.
When a cardholder makes a purchase in the card-not-present realm (e-commerce, m-commerce, phone order, mail order, etc.), receives the order as described, and files a chargeback through his or her issuing bank, that individual is committing friendly fraud. If the cardholder successfully wins the transaction dispute, he or she not only gets away with the refund, but that person also keeps the product and leaves the merchant with empty pockets and a tarnished chargeback reputation.
Friendly fraudsters get products for free, while merchants who delivered on their promises are forced to pay chargeback fees and witness an increase in their chargeback ratio. If a merchant reaches excessive chargeback levels, not only are they at risk of losing their merchant account, but major card networks may even take away their authority to processes payment card transactions.
There are many different reasons why cardholders may be committing friendly fraud.
- Unknowingness - Some consumers do not realize the difference between a chargeback and a traditional refund.
- Convenience - It is seemingly easier and more efficient to simply call the bank instead of the merchant.
- Customers want something for free - Friendly fraudsters know that there is very little recourse to filing an unwarranted chargeback.
How Can It Be Prevented?
Preventing friendly fraud chargebacks is not a foolproof system. However, there are steps that can be taken to deter customers from taking advantage and stop them in their tracks.
If you are a merchant, you cannot simply sit back and let your profits be stolen.
Implement software that is made to protect you. Programs like the Address Verification System and 3D Secure are designed to protect merchants from fraudsters. Adding a step to the checkout and authorization processes may deter you at first, but if they deter the criminals from choosing your business as a target, they are working.
Customer service and accurate documentation are crucial to winning a chargeback dispute against a cardholder who is committing friendly fraud. Be in contact with your customers as often as you can and start immediately. As soon as the purchase is completed, make contact. Send confirmation emails every step of the way. Make it as easy as possible to contact you. And then, hold on to the communication.
Request as much information from the customer as you think you might need. Always require card security codes to make a purchase. Utilizing electronic signature pages is also a good idea to add to the validity of the purchase. Asking things that only the cardholder will know is a good way to weed out friendly fraudsters.
Photo by jannoon028/FreeDigitalPhotos.net
Monica Eaton-Cardone is Co-founder and COO of Chargebacks911.com.