Some "friendly fraud" is more manipulative than friendly. Global Risk Technologies wants to help merchants appeal more chargebacks and get back some of the billions of dollars lost to friendly fraud.
Friendly fraud typically occurs when the accountholder (or someone known to the accountholder, such as a spouse) authorizes a purchase and then later claims it to be fraud. As more payments move away from cash, more consumers are tempted to use this method to recoup funds spent on a legitimate purchase.
"With the expansion of digital commerce specifically...we've seen increases in this type of fraud," said Monica Eaton-Cardone, chief information officer at Global Risk Technologies, a company founded in 2012 by merchants.
Since 2012, friendly fraud has increased 41%, said Eaton-Cardone, while instances of fraud from stolen credentials or chargebacks from merchants' mistakes have dropped.
Global Risk Technologies provides remediation technology for loss prevention from chargebacks. In 2013, merchants lost $11.8 billion from friendly fraud, Eaton-Cardone said. Global Risk Technologies takes a percentage, usually 15% and up, of the merchant funds it recovers. The percentage changes based on a number of variables, including geography, value of the sale and card type.
When consumers initiate a chargeback, they are given a temporary refund from the card company, but the merchant has a window of opportunity to appeal that chargeback. If it's found that the chargeback was filed unjustly, the money gets refunded to the merchant.
But many merchants write off chargebacks as "just a cost of doing business," Eaton-Cardone said. By not taking action against illegitimate chargebacks, merchants invite consumers to repeat the process. Education is also a factor; some consumers may not realize the difference between a chargeback and a refund.
Plus there are chargeback thresholds put in place by the card schemes that merchants must stay under, so there can be financial and reputational consequences to letting consumers file repeated chargebacks.
Of the consumers who file an illegitimate chargeback and don't see any repercussions, 40% will file another chargeback in three months and a third in the next 90 days, said Eaton-Cardone.
"From what we've seen it starts from a point of ignorance on behalf of the consumer but the trend is that once that happens, then they start to realize and get educated to the loophole and that becomes a dangerous affair," said Eaton-Cardone. "If merchants don't ever fight these cases, you end up getting more of this fraud, not less."
But it's not just on the merchant to act. Eaton-Cardone said banks should also take initiative to educate consumers when they call for a chargeback.
The industries that typically experience higher rates of illegitimate chargebacks are luxury clothing retailers and electronics, said Eaton-Cardone. Global Risk Technologies represents about 2,500 merchants.