E-commerce is growing and friendly fraud chargebacks are too.
While U.S. retail sales may fluctuate depending on the season and economic climate, one thing remains constant: friendly fraud is on the rise. It’s reported that the 2014 holiday season presented a sales slump for retailers, decreasing to $442.9 billion in December and never quite recovering. When this occurs, merchants face financial pressures not only from the slump in sales but also from the fact that fraud levels remain consistent. Friendly fraud costs retailers almost $12 billion in losses each year for retailers. The trend is not slowing as Visa reports that it has risen 41% in recent years. Other reports state the e-retailers with revenue of $25 million or more say they believe friendly fraud has increased in the last two years.
The other side of the e-commerce coin is that the industry is growing rapidly – the U.S. is currently ranked the #1 e-commerce market with an increase by 15% from 2013 to 2014, totaling $238 billion. This growth draws increased risk for CNP merchants who are an easy target for cyber shoplifters. And the rising prevalence of friendly fraud has highlighted a disturbing trend among CNP merchants – many are accepting it as the cost of doing business. More than ever, merchants are willing to absorb the losses borne of friendly fraudsters, having made up their minds that disputing the chargeback will just result in wasted resources and additional losses.
How Friendly Fraud Occurs
Friendly fraud may be accidental. This happens when a consumer doesn’t recognize a charge and disputes it. It may be unclear on their billing statement or a family member may have made the purchase without their knowledge. There are a number of preventative measures merchants can take to avoid this type of friendly fraud:
- Be clear about who you are. If your business utilized a third-party billing service, publish that information clearly and noticeably on your website so that customers aren’t confused by their billing statements.
- Use soft descriptors. Soft billing descriptors allow you to provide a custom descriptor containing unique product or order details to help ensure recognition of the charge by the consumer. These can be included in the description sent to the credit card company when a payment card is billed, adding clarification about the supplier.
- Prepare for special circumstances. Friendly fraud is difficult to predict, so best practice is to retain documentation about the customer and the purchase in case you need to present it as evidence in the case of a dispute. This documentation includes:
- Proof of successful download
- Proof of product usage, such as login or IP tracking (Login, IP, etc.)
- Confirmation of delivery
- Proof of shipping such as tracking pictures of shipped products
- Detailed descriptions of products
The most common – and expensive – form of friendly fraud is deliberate. In these cases, fraudsters game the system in an attempt to get merchandise or services for free. These shrewd cyber shoplifters can be difficult to evade and a merchant’s best bet is to have a layered fraud prevention strategy in place to cover all bases.
What a Rise in Friendly Fraud Means for Merchants
Increases in friendly fraud signal that more consumers may be stretching the truth to convince banks to side with them in chargeback disputes. While chargebacks were originally created as a consumer protection measure, they now have major consequences and financial impacts for merchants…and all players in the ecosystem.
When fraudsters use friendly fraud as a refund method, it creates costs for the card issuer, the merchant and even the consumer, who pays in increased prices. Retailers lose $3.08 for every dollar of fraud in addition to up to $40 per chargeback. What goes up must come down, so merchants are forced to raise their prices to account for the extra costs they incur. 
Merchant Inertia Exacerbates the Problem
Fighting friendly fraud is expensive and the outcome is never guaranteed. As mentioned earlier, issuers tend to side with consumers, making the prospect of fighting these types of chargebacks daunting and costly for merchants. But accepting friendly fraud as a cost of doing business may do even more damage.
When merchants accept friendly fraud because they cannot justify the resources and effort required to dispute these chargeback claims, they inadvertently perpetuate the rise of friendly fraud. It’s a vicious cycle.
|The impacts affect all parties in the payment ecosystem:
For merchants, friendly fraud is death by a thousand paper cuts. Whether accidental fraud – where the consumer absentmindedly forgets making the charge – or intentional, it’s a gradual compilation of chargebacks and costs that merchants can’t afford. Even at $5 per chargeback, these costs chip away at the bottom line and add up to insurmountable expenses. 
Not fighting adds to the perception that friendly fraud is OK or that “everyone is doing it.” Reports already illustrate that consumers are not too concerned with this problem: roughly 25% of consumers don’t have a problem with people committing friendly fraud.  Fraudsters have tuned into this mentality and found even more strategic ways to game the system. Cyber shoplifters are especially active around the holidays, using chargebacks as a budgeting tool for Christmas purchases.  To put a stop to it, merchants must implement better operational processes and business solutions to streamline the dispute process, reduce these fraudulent chargebacks and fight the ones that are appropriate and winnable.
Friendly Fraud levels will continue to increase
Friendly fraud happens for a number of reasons, both internally and outside of an organization. In regards to the latter, there will always be cyber criminals looking to profit at the merchant’s expense. This calls for customized fraud prevention tools that stop the bad guys from penetrating your business without turning away legitimate sales. There are also internal process factors that can contribute to increased friendly fraud:
- Merchants that use affiliate marketing often see an increase in chargebacks blamed on false advertising or erroneous claims.
- The type of good/service can impact friendly fraud as well. Some products are more prone to cause “buyer’s remorse,” including subscriptions and upsells. These can be especially damaging since merchants cannot recover a gym membership, for example.
- Lax or unclear dispute policies make it easier for fraudsters to claim that a transaction was unauthorized. This is compounded by most issuer dispute policies, which tend to be consumer-centric and biased.
In looking ahead, the trend shows no sign of slowing. One current industry event that will have even greater bearing on CNP fraud is the transition to the EMV payment standard, which is expected to force fraudsters online in droves. Experts predict we will continue to see a jump in cyber shoplifting as chip & PIN technology all-but-eliminates in-store fraud. 
Representing to recover funds from chargebacks – A difficult task for many merchants
Chargeback representment is a path to help merchants recover some of the revenue they would have lost to a chargeback. By providing evidence, merchants can have a chargeback reversed and retrieve the funds they initially lost to the chargeback. Some merchants opt to do this in-house; however, because of the extensive research and knowledge of complex reason codes, many choose to employ a team of specialists to do the heavy lifting or at least supplement their in-house operation. Outsourcing this function entirely or working with a vendor in conjunction with an existing operation can free merchants up to focus on their core business, while professionals with a thorough understanding of different chargeback types and procedures work on their behalf. 
Most of these chargeback revenue recovery services have in-depth knowledge of how the representment requirements differ by card association and chargeback type as well as the best way to present supporting evidence to maximize success rate.  Additionally, they can automate these complex processes and leverage existing relationships with issuing banks. 
|Fighting Chargebacks can be difficult as rules surrounding complex reason codes are complex and always changing. Having a seasoned team of experts on your side can help comb through the details and ensure you represent as efficiently and effectively as possible. Did you know Visa recently updated the rules for certain chargebacks that apply specifically to airlines and digital good merchants?For representments processed on or after 17 October 2015, Visa has effectively introduced new types of compelling evidence as well as new representment rights that require additional pre-arbitration certification requirements. These changes are applicable to the following reason codes as they apply to airlines and digital goods merchants:30 – Services Not Provided or Merchandise Not Received53 – Not As Described or Defective Merchandise81 – Fraud – Card Present Environment83 – Fraud – Card Not Present EnvironmentFor complete details, visit: http://usa.visa.com/download/merchants/visa-optimizes-dispute-rules-new-avenues-for-card-not-present-mechants.pdf|
Don’t believe the myths
There are a lot of false ideas about the representment process as well as how chargebacks and reversals impact your business. We’ve outlined the most popular below, countering with the facts behind these erroneous points.
Myth: Winning chargeback disputes will reduce your monthly chargeback ratio with your acquiring bank
Reality: Chargeback ratios are determined based on initial chargebacks received to sales processed. Chargebacks are not reduced if represented and won; once they occur, they count against a merchant’s chargeback ratio, even though a merchant may be recovering money.
Myth: It’s impossible to win a CNP chargeback if you don’t have a signed receipt
Reality: Compelling evidence can include a number of items other than a signed receipt, including consumer authentication steps or e-mails proving a link between the card holder and the purchase.
Myth: You can’t lower your chargeback ratio without reducing sales
Reality: There are a number of steps merchants can take to lower their chargeback ratios without reducing sales. A common method is requiring customers to register their cardholder information (validated by answering a number of questions to which only issuers and the cardholder know the answers and selecting a secret phrase and password).This feature allows online merchants to validate return visitors in a simple, non-intrusive manner, preserving legitimate sales.
Myth: You can’t fight PayPal Disputes
Reality: PayPal offers Seller Protection from chargebacks to merchants who meet the eligibility requirements based on Unauthorized Transactions or Item Not Received. The scope protects Sellers for the entire amount of payment and also waives the Chargeback Fee, if applicable.
Myth: The only thing I need to be concerned about is the first representment win rate, which is the best measure of success when it comes to fighting chargebacks and reclaiming revenue.
Reality: The best way to judge success is by the “net win rate.” Net win rate deducts representments returned a second time and reflects only those reversals confirmed as won. Only looking at the first representment win rate can paint a false picture and exaggerate successes since many ultimately get reversed. Many times a service provider will quote the first reprensentment win rate as a sales tool to attract new business. It’s best to inquire about this metric, but also to evaluate the net win rate as the best gauge of benefit and results.
Verifi’s Total Chargeback Management System Tackles the Problem from End to End
Verifi’s Total Chargeback Management System not only provides merchants with a mechanism to stop friendly fraud on the front end but also offers the expertise needed to recover revenues from chargebacks that sneak through. This service combines unmatched, award-winning solutions to provide end-to-end dispute management as a completely outsourced solution or as a way to augment a merchant’s current operation:
- Significant reduction of risk– stops up to 40% or more for BOTH fraud and non fraud (“friendly fraud”)
- Improved profitability – win rates nearly 2X industry average on chargebacks that do occur
- Streamlined total chargeback management – merchants optimize capital with zero guesswork about refunding transactions and reduce time and operational costs on processing chargebacks that can’t be avoided
- Key activity based reporting measures all critical metrics and performance
Many merchants rely on single point solutions, which can end up being a lose/lose. Single point solutions that only focus on either prevention or recovery, leaving half the chargeback problem to fester and eat away at the bottom line. Stacking point solutions often costs tens of thousands of dollars in integrations and re-integrations that are either incomplete or unnecessarily redundant. Merchants fare best with a proven solution that provides full coverage for all reason codes, backed by a team of experts to compliment an existing operation or navigate the murky chargeback waters entirely on the merchant’s behalf.
- Unlike other point solutions, Verifi’s Total Chargeback Management System produces immediate risk management and profit improvements.
- Only proprietary end-to-end solution backed by a decade of expertise for chargeback prevention, dispute management and revenue recovery.
- Near real-time notifications alert merchants of chargebacks immediately, enabling quick resolution.
- Provides detailed reason code feedback and insight into operational issues.
- Best Chargeback Management Program last three years.
- Verifi manages hundreds of thousands of both fraud and non-fraud chargebacks EVERY month.
- Patented, closed loop network helps merchants avoid false positives that tend to sneak through in point solutions and result in higher costs and unnecessary refunding.
Friendly fraud can’t be ignored and brushing it off as a “cost of doing business” will only exacerbate the problem for everyone within the payments ecosystem. As market forces like EMV encourage cyber shoplifters to use the online channel and as consumers find it increasingly easy to dispute legitimate charges (and win), merchants have their work cut out for them. Process improvements and operational changes are a good beginning to combating the friendly fraud problem, however these efforts can quickly exhaust time and resources and they may detract focus from the core business. Working with a third party vendor that provides a comprehensive chargeback solution to prevent and fight chargebacks can address this growing problem and streamline the fight against friendly fraud……and ultimately boost sales.