Friendly fraud may sound like less of a threat to business than other more large-scale, aggressive attacks, but this sleeper predator costs retailers nearly $12 billion per year, leaving unprotected merchants completely empty-handed and liable for fraud that wasnt really fraud in the first place.
Friendly fraud, or chargeback fraud, occurs when a consumer purchases goods online with a credit card, keeps the merchandise, and then reports the transaction to his credit card institution as illegitimate, thereby initiating a reversal of the charge.
Chargeback fraud is more common than expected because its not always an intentional transgression by the consumer. Transactions handled by third-party payment systems, like PayPal, for instance, often show up on credit card statements with unfamiliar descriptions. A customer could easily fail to recognize a transactions label and report it as fraud due to lack of investigation or thorough bookkeeping.
Furthermore, a family member may simply not know that someone in her household has made a purchase with a credit card, assuming that a particular transaction is unauthorized, and, as a result, report it as fraud.
Consequently, merchants who arent adequately protected are plagued with the costs of mitigating chargebacks and end up bearing substantial revenue losses.
Fortunately, there are sophisticated safeguards that merchants can incorporate into their transaction processes in order to minimize chargebacks, such as using an address verification system (AVS). An AVS verifies that the billing address provided by the customer is the same address on file with the issuing institution. This added security step can help to prevent fraud from occurring right from the start.
Also, requiring consumers to provide security code information for the credit cards theyre using helps to confirm that purchasers have the actual card in-hand, rather than just a stolen number. Like an AVS, requiring security code information can help to prevent fraud from occurring in the first place.
Another method is using traceable shipping methods, which allow senders to verify that a package has been received at the intended destination. Traceable shipping methods are useful in the actual refuting of an invalid chargeback claim.
Also, it's helpful to user payer authentication programs include Verified by Visa and MasterCard SecureCode. These programs help to fight friendly fraud by creating a chargeback liability shift from the merchant to the cardholders issuing institution. This way, the merchant is not financially penalized due to the fraud.
Contrary to its name, friendly fraud is friendly to neither merchant nor consumer. When it comes to friendly fraud, the only ally in the game is prevention so that merchants arent made to suffer from the false notorious claim, it wasnt me.
Paul Tabet is COO of 29Prime.