Researchers find 86 percent fraud in chargebacks

Global Risk Technologies, a chargeback remediation company based in Dublin, Ireland, with a subsidiary in Clearwater, Fla., published a white paper examining "friendly fraud," a growing challenge for e-commerce merchants in both the United States and Europe.

The company's findings show that approximately 86 percent of chargebacks are fraudulent, and many consumers bypass merchants to directly file complaints with card issuing banks. According to a recent study by Visa Inc., this type of fraud is growing at approximately 41 percent per year, costing merchants and card brands billions of dollars in lost revenue.

The hidden costs of free

"Friendly fraud is an inappropriate name for this most unfriendly form of deception," said Global Risk Technologies Chief Information Officer Monica Eaton-Cardone, who called the practice a "learned behavior."

She acknowledged that most consumers don't intentionally try to get something for nothing the first time they initiate a dispute with a payment card issuer. However, Global Risk Technologies' study found that after a relatively frictionless chargeback experience, a majority of consumers become serial offenders, filing new complaints in fewer than 90 days after their first successful chargeback.

"Many consumers don't understand how much they harm themselves with the high costs of chargebacks," Eaton-Cardone stated. She cited Amazon restocking fees and higher membership dues among subscription billers and payment card brands as examples of hidden costs and higher prices resulting from chargebacks.

Consumer culture of opportunism

"Many consumers see chargebacks as a victimless crime," Eaton-Cardone said, adding that many consumers view online merchants as nameless, faceless places that sent them a product they didn't like. She credited impersonal relationships between customers and e-commerce retailers as a leading excuse for card-not-present chargebacks.

Eaton-Cardone noted additional justifications for chargebacks, such as "I'm a victim of overspending" and "I don't feel that guilty because my bank has stolen so much from me in fees." She views a recent epidemic of high-profile security breaches combined with merchant and card brand efforts to keep customers happy as contributing to a culture of opportunism.

Tony Wootton, Senior Vice President and Chief Revenue Officer at Los Angeles-based Verifi Inc., said consumers have become savvier at managing their payment card accounts. He noted that as people become more familiar with going online to look at credit card activity, they can dispute a charge in real-time, sometimes before they even receive their credit card statements.

Wootton also cited indecipherable descriptors as a leading cause of cardholder initiated inquiries. "I don't even recognize 25 percent of [legitimate] charges when I quickly glance at a descriptor," he said, noting that consumers either don't recognize charges on their billing statements or may realize that they forgot to cancel a recurring subscription. Wootton called subscription merchants "the most abused," with a disproportionately higher percentage of chargebacks than all other categories in Verifi's merchant base.

Contributing factors to chargebacks

Wootton attributed an overall increase in all types of card-not-present fraud in the United States to the growing adoption of the EMV (Europay, MasterCard and Visa) standard, which has been found to thwart card-present fraud and cause a shift of criminal activity and "friendly fraud" to more vulnerable online transactions.

The Global Risk Technologies study cited three contributing factors to card-not-present fraud in Europe:

1. Merchants who are unable to tackle the problem effectively
2. Consumers who wouldn't consider themselves fraudsters are carrying out fraudulent activity
3. Card schemes are unwilling to properly address the fraud"

In defense of card brands' tendency to quickly approve consumer disputes and inquiries, Wootton described chargebacks as "resource-intensive," requiring someone to evaluate each incident and determine its viability. As a result, many issuers will quickly approve a chargeback rather than open an investigation.

Remedies and recommended actions

Eaton-Cardone said that reducing friendly fraud will improve the payments ecosystem, help merchants grow their businesses and remove liabilities. Global Risk Technologies' survey included a recommended list of actions to promote a culture of accountability among consumers and help merchants challenge chargebacks:

• Employ best practice by maintaining receipts and clearly stating refund and cancellation policies.
• Improve customer service by making it easier for customers to reach out with inquiries.
• Identify and tackle threats early by looking for patterns and maintaining dynamic, real-time monitoring of payment activity.
• Maintain excellent online security while conducting "a smooth and speedy" customer experience.
• Challenge with confidence. "You know the goods were delivered and were sold as advertised," the paper stated. "You know when the customer hasn't contacted you through any of your multiple channels. Your risk reporting tells you that this has the characteristics of fraud. You know it was sold securely. So challenge that chargeback."

A free copy of the Global Risk Technologies friendly fraud white paper is available at bit.ly/grtffwp.

Editorial Note:

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