What Is Friendly Fraud?

31 May

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Retailers are long familiar with physical shoplifting, but as commerce shifts online, many are not nearly as familiar with a new type of fraud—Friendly Fraud, something akin to shoplifting, but perpetrated online…

Friendly Fraud, frequently referred to as illegitimate chargebacks, are a big problem for e-commerce, costing retailers over $12B annually (as reported by Visa). The FBI reports Friendly Fraud as one of the top risks to Global e-commerce. This fraud destroys a retailers’ margin and can even put a retailer out of business. Why does this happen and what can you do about it?

Like many things in life, when there is a loophole, humans will find a way to exploit it. The loophole here includes the lack of signature on the credit card transaction. With card-not-present (CNP) transactions it’s easy for a customer to call their bank and claim they did not receive the merchandise. Because there was no signature to prove or disprove this claim, customers often get away with this scheme. With today’s “The Customer is Always Right” mentality, most retailers take the customer’s account as the final word and never challenge the chargeback—but they should.

LexisNexis Risk Solutions reported fraud losses as a percentage of the retailers’ online revenue increasing from 0.68% in 2014 to 1.47% in 2016. This represents a staggering increase in fraud, and hurts their bottom line in a significant way. This can be deadly when coupled with the overall decrease in margin being seen by many online retailers. Approximately 80% of all chargebacks are Friendly Fraud. We find in better than 60% of these cases the customer never even contacts the retailer, so it’s not a failure on the retailer but purposeful fraud by the customer. Customers somehow feel this fraud is not quite the same as stealing from the retailer—but it is. Our advice is to challenge all Friendly Fraud chargeback cases.

Most retailers do not fight Friendly Fraud because they do not understand the process or feel it’s too expensive and time consuming. The most challenging part of Friendly Fraud is the human element—it’s very difficult to predict human behavior. You really have no idea who is doing it, for what reason, nor when it’s coming. But once you begin, you will see patterns. By challenging each Friendly Fraud case you will also send a strong signal to your customers that you will not tolerate this type of abuse. Customers commonly share on social media which retailers fight Friendly Fraud and which ones do not. Do not accept Friendly Fraud as a cost of doing business. There is no time like the present to begin challenging these cases.

If you would like help combating Friendly Fraud, feel free to drop us a line at connect@chargebackops.com.

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