Businesses have seen an increase in friendly fraud over the last few years. However, according to the recently-released 2022 Chargeback Field Report published by Chargebacks911, only a small percentage of merchants seem to be addressing the issue successfully.
Many respondents to the survey reported an increase in chargebacks from criminal activity. However, as with the previous year’s report, first-party threats like friendly fraud were a standout concern. In fact, over two-thirds of the merchants who tracked chargeback trends within their business noted an increase in friendly fraud incidents between 2021 and 2022.
The term “friendly fraud” refers to any abuse of the chargeback process—whether deliberate or by accident—on the part of cardholders. About three-quarters of those surveyed said that friendly fraud was a “moderate” or “significant” concern for their business.
That said, the study also reveals that fewer than one-third of respondents are currently taking steps to address friendly fraud. Among enterprise-level businesses (those with more than $100M in annual revenue), just 10 percent of respondents felt they were successfully managing friendly fraud.
So, what’s going on? Why is this widely-recognized problem going unaddressed? The crux of the issue is a general lack of understanding among merchants about the nature of friendly fraud.
Understanding Friendly Fraud
Card payment chargebacks are considered a necessary safeguard to protect customers against criminal fraud. They also help defend against merchant abuse or other issues that may arise during a transaction.
Chargebacks were designed to ensure that customers are not held accountable for transactions they did not authorize or charged for items they did not receive. So, they fill an important role as part of the ACH payment process. Since the creation of this “safety net” in the mid-70’s, though, advances such as eCommerce have dramatically altered the way we shop.
The chargeback process has failed to keep pace with technological change. Today’s consumers are much more informed about their rights, and they understand how chargebacks can work in their favor. This leads some cardholders to abuse the process.
Illegitimate payment disputes, either filed by mistake or by unscrupulous cardholders who know how to game the system, are a fast-growing problem for merchants. Friendly fraud already accounts for the bulk of chargeback volume. And, according to internal data from Chargebacks911, about 61 percent of all chargebacks issued will probably be friendly fraud cases by 2023.
Merchants recognize the problem, but they aren’t doing enough to stop it. In many cases, this is because it’s so hard to identify the source of first-party threats.
Where Does Friendly Fraud Come From?
While it may be getting easier to admit that friendly fraud is a problem, pinpointing the sources can be trickier.
Traditionally, it’s been difficult for merchants to distinguish friendly fraud from legitimate chargeback sources like criminal fraud. Chargeback reason codes are unreliable indicators because friendly fraud often hides behind false reason codes.
The average merchant lacks the time and resources to engage in the kind of in-depth data analysis necessary to detect and identify friendly fraud sources. This suggests that friendly fraud is probably an even bigger problem than merchants realize.
There’s also the fact that, in many cases, customers aren’t wholly responsible for a chargeback. A small portion of chargebacks are clear cases of “cyber shoplifting,” meaning the cardholder knowingly abused the chargeback process. But, merchants can also trigger chargebacks themselves through inefficient policies. The bulk of customer disputes will fall somewhere in between these two poles.
It’s also likely that any given chargeback could be traced to more than one source. To illustrate, imagine a merchant sells shoes. One particular pair is light brown, but the online picture has a slight reddish tint. The merchant must accept some responsibility here, as the picture isn’t totally accurate.
However, what if the customer didn’t like the shoes, but the reason the buyer ultimately disputed the charge was because they simply didn’t want to pay return shipping and restocking fees? They call the bank directly and say the product was not as described. While the claim is true to some extent, the consumer is deliberately trying to break the purchase contract.
One chargeback, two potentially true sources.
Also, fighting a chargeback claim—even an obviously invalid one—is costly and time consuming. The process involves complex regulations and tight deadlines. It’s no wonder why merchants throw up their hands and decide chargebacks just take too much time and effort to manage.
What Can Merchants Really Do?
Chargebacks are not completely avoidable. Mistakes can still happen, so there’s no way to guarantee against all disputes. That said, the Field Report seems to suggest that getting professional help really does pay off.
Survey respondents who use a third-party chargeback management solution reported a net recovery rate more than 50 percent higher than those who managed disputes entirely in-house. The report goes on to find that, of those using an outside provider, the three most-often-cited benefits were a lower chargeback rate, increased revenue, and reassurance that the business is compliant with chargeback regulations.
There are plenty of strategies merchants can implement on their own to manage chargebacks without deterring buyers, too. Some examples include:
- Simplifying the return process
- Reminding customers before rebills
- Providing live, attentive, round-the-clock customer service
- Being responsive across all social media channels
- Being transparent about costs and billing practices
- Using billing descriptors that are clear and easy to identify
Regardless whether merchants opt to address this problem in-house, or seek outside assistance, it’s not an issue that they can afford to ignore any longer. Chargeback abuse is going to continue happening until merchants get proactive and start to tackle this problem head-on.
