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Banks and regulators also bear blame for Facebook’s ‘friendly fraud’

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Facebook’s stance on friendly fraud is not breaking news. There has been a lack of online transparency affecting the company's retail clients for years.

This is not affecting not only consumers, but also big brands—to stay competitive with evolving consumer demands, retailers have pushed the envelope thanks to a lack of regulatory payment standards.

As a result, big retailers are making risky decisions: raising prices, reducing security checks (to increase authorizations and reduce potential declines), even running promotions that lose money because they are desperate for new customers.
This is a top-liner-revenue game that is at risk of commoditizing all products and services online.

Friendly fraud, also called chargeback fraud, is when cardholders intentionally (or sometimes unintentionally) bypass the merchant and ask their bank for a refund directly. There is an increasing number of cardholders who know their actions are dishonest yet call the bank anyway, in a form of cybershoplifting. This type of behavior has only become a large-scale threat in the last few years.

Accidental friendly fraud happens with consumer and banks, becoming the largest percentage of friendly fraud; according to recent case studies on digital goods merchants, it is averaging 57.6 percent of the total friendly-fraud chargebacks.

Compared with trends just 12 months ago, this type of friendly fraud has increased by 20 percent. Intentional friendly fraud is calculative and deceptive; it's a method used to take advantage of a merchant and get something for free—using the dispute mechanism in an unethical way.

Unintentional friendly fraud—accidental—happens more often as a result of poor consumer and poor issuer (bank) education, and a lack of consistently applied policies.

The most common type happens in digital goods purchases where the transaction is in-app, or through a game console such as Play Station or Xbox. In a scenario like this, the cardholder stores their card for future use and provides access to use this payment method, to their child. Over time, purchases are made—without the parent’s knowledge.

This is where a shift in responsibility becomes confused, which is at the crux of the issue.

A responsibility of possessing a credit or debit card, is to protect your account (with parental controls) and regular oversight. Not using these types of controls and then filing a chargeback to recover the transactions that “were not authorized” is a form of friendly fraud. The responsibility lies on the cardholder, not the merchant.

When a merchant uses trickery to disguise charges, it's another claim altogether. In this scenario, of course, a chargeback would be warranted, and the merchant would and should be penalized.

The real problem is there’s no global regulation on the internet—and as a result, brands are being eroded and lowering in value. And the consumers are the ones who are hurting ultimately—they are paying dearly.

Let's look at the problem a little differently. Simply stated, we have the classic formula at play, of supply and demand. The demand is for instant gratification, no additional clicks, immediate results, and consumers are driving this. Whoever can supply this will win the business, regardless of whether the practice is viewed as unethical. The U.S. has proved to be most willing to deliver — by being unwilling to adopt the security policies and protocols that are touted through the rest of the world. Is this culture feeding the beast?

Is Facebook solely to blame? Or are Visa and Mastercard culpable in this? Are gaming companies complicit?

Policymakers and regulators need to address the reality of what is going on. Are governments endorsing this behavior in their new regulations?

What global regulations need to be created that stop this?

These are the questions retailers, banks and regulators need to be asking.

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