Managing eCommerce fraud is extremely challenging, leaving many merchants stuck between elevated exposures and disrupting valuable customer experiences. Going it alone means merchants must invest heavily in fraud detection tools, collaborate with third-party agencies, and dedicate numerous resources to mitigating fraud. A daunting task for sure. However, digging a little deeper, there is an even more troubling trend at play.
Most eCommerce fraud is perpetrated by criminals using compromised information to make unauthorized purchases. However, there are much less suspect customers to watch out for—customers with impeccable digital risk profiles that pass every fraud screening test but make authorized purchases and later claim them as unauthorized. It’s difficult enough to effectively sniff out the traditional fraudsters, much less battle disputes from “good” customers who simply don’t want to pay for their merchandise.
This type of common first party fraud is known as “friendly fraud.” And just as fraud trends evolve over time, friendly fraudsters alter their tactics to stay a step ahead of unsuspecting merchants. Friendly fraudsters order a product or service and provide legitimate billing and shipping information. After receiving their order, they contact the merchant or their card issuing bank and dispute the charge. Friendly fraudsters use various false claims to substantiate their dispute. They may claim:
- The order never arrived.
- The service was never rendered.
- They don’t recognize the transaction.
- The transaction was unauthorized.
- The goods were damaged.
They may also circumvent the bank and make a false claim directly with a merchant’s customer service team who might be quick to accommodate the request in order to keep the customer happy, including shipping a replacement without requiring the return of the alleged damaged item.
While these scenarios might not align with traditional eCommerce fraud, intentionally creating an invalid claim is indeed fraudulent; merchants must be adept at managing friendly fraud or it can be costly. Consider these facts:
- Merchants lost $11.8 billion to cases of friendly fraud in 2012 and 40% of consumers who engage in friendly fraud will do so again within the next 90 days, according to Visa.
- Friendly fraud has risen 41% since 2011 and 86% of chargebacks are linked to friendly fraud, according to a CBS News report.
- Friendly fraud is one of the top three threats to eCommerce, according to the FBI.
Digging deeper into the friendly fraud problem
Friendly fraud is very complex and it is difficult for a merchant to validate if a customer’s claim is warranted. A customer’s order might have been stolen from his doorstep or delivered to the wrong address. It may be an honest mistake, where the customer doesn’t recognize the charge because the order was placed by a member of his household without his knowledge, or he may be confused by a billing description that is from a third- party processor, not the actual merchant.
The complexity is exacerbated further by the customer bypassing the merchant and going directly to the payment processor to dispute the charge. Research from Verifi shows that 86% of the time cardholders will not contact the merchant until after a dispute was filed—or even worse, not at all. Now the merchant is faced with a labor intensive manual process and the potential for additional losses in the form of chargeback fees levied by the payment provider.
Any chargeback activity on a transaction means that the merchant will incur costs, ranging from the chargeback processing fees and acquirer fees to operational and labor costs. With payment processor rules usually favoring customers over the merchant, there is no guarantee that the merchant will win—even if the chargeback representment is followed to the letter.
Since the burden of proof and cost lies with the merchant, it is the merchant’s responsibility to collect all supporting facts in documentary form, which can include address verification, CVV verification, IP address information, and product delivery and confirmation records. Subsequently, the merchant needs to decide the right course of action—challenge or accept the liability—based on compelling evidence, the dollar value of the disputed charge, and the potential chargeback fees.
What to do when good customers turn bad
- Clearly communicate: Merchants should be upfront and clear with customers about their policies and practices, especially regarding billing, shipping, and refunds. Merchants should also immediately email order invoices and product details, and ensure that the billing descriptors are clear. This will make it easier for the customer to recognize the charge and lessen the possibility of the charge being disputed.
- Know your customer: Merchants should use chargeback data and customer service data to analyze a customer’s profile and identify abusive claim patterns. Customers’ claim history and chargeback data (for both fraud and non-fraud issues) will help pinpoint friendly fraud and improve prevention methods. Merchants should look for customers who are repeatedly filing disputes or contacting customer service teams directly to get a refund. In order to combat friendly fraud, it is very important for merchants to know their customers and, more importantly, know the repeat offenders. By maintaining a list of customer names, shipping addresses, and other data points from customers claiming non-receipt, damaged merchandise, etc., merchants can cross reference this information when a new order is placed. If the same customer, shipping address, or other data point is repeatedly associated with claims, it is likely that this person is committing friendly fraud and the appropriate action can be taken.
- Enforce stricter order processing: Once repeat offenders are identified, make a signature mandatory for proof of delivery for all future orders from these customers. This measure will help protect the merchant from chargeback issues and it will increase the shipping cost for the customer. Both the signature and higher shipping fee should be red flags for the customer that he is under increased scrutiny, and will hopefully deter him from making future attempts of friendly fraud. Merchants can also establish a variety of parameters around friendly fraud customers such as limiting the total dollar value of an order. Ultimately, the goal is to frustrate friendly fraudsters by making order processing stricter to prevent fraud and protect the merchant if a chargeback issue arises.
- Put customers on notice: For chronic abusers, extreme measures might be warranted. Notify customers in writing that no further refunds will be issued due to repeated, unwarranted claims. Also, the merchant should have the customer sign an affidavit prior to processing any future orders. Doing so will help absolve the merchant of chargeback liability on any future online purchases. However, merchants should weigh the possibility of negative repercussions on social media and customer reviews against the fraud risk.
- Leverage chargeback representment: A merchant’s chargeback team should aggressively fight and refute chargebacks that indicate abusive customer claims patterns. Engaging in representment informs the bank that the merchant is not liable and, most importantly, sends a message to the card issuer that more due diligence is required the next time the customer requests a bank issued refund by initiating a chargeback.
Friendly fraud case study
The following real world case study of friendly fraud worked by a professional chargeback team provides some valuable insight.
Background: This case study is for a single online transaction of jewelry items totaling $46,000. During order processing, the online order was flagged for manual review by the merchant’s third-party professional fraud investigators. The order information was verified with the customer by phone, as well as with the credit card issuing bank prior to approval. With all information verifying and matching to the customer, the order was processed and fulfilled. The shipment was confirmed to be delivered and received by the customer including a signature confirmation, per the carrier’s website.
Customer initiates a refund request with the merchant’s customer service: The customer contacted the merchant’s customer service team and claimed she received store magazines and catalogs in the shipping box, but not the jewelry she ordered. She demanded a refund. The merchant’s chargeback team conducted an extensive review of the claim and confirmed the merchandise was packaged and shipped in a secure environment, with due diligence. Based on the evidence, the team concluded that the claim was in fact fraudulent—one more perpetrator trying to score big with friendly fraud. As a result, the merchant denied the refund request.
The customer still insisted she did not receive the ordered items. To further investigate the customer’s claim, the merchant initiated a carrier investigation. The carrier confirmed the merchandise was delivered to the authorized shipping address and a signature was obtained as proof of receipt. The customer’s refund request was again declined by the merchant.
Customer disputes the charge with the card issuing bank: Since the customer’s claim was declined by the merchant, the customer then contacted the credit card issuing bank and disputed the transaction, claiming she did not receive the merchandise. The chargeback team reviewed the customer’s transaction history and interactions with the merchant’s customer service team. This led to a suspicion that this was a case of friendly fraud. The chargeback team collaborated with a third-party investigation team and requested a customer account review and investigation. The third-party team found a recent criminal case with a United States carrier involving another high dollar purchase. In fact, the customer had multiple claims with different merchants that were very similar to the claim under investigation.
Compelling evidence compiled to refute the chargeback claim: In order to refute the claim, the chargeback team compiled supporting documentation that included itemized order details, proof of delivery, and proof of customer interactions. The proof of delivery was comprised of the full audit trail, from packaging at the warehouse and delivery by the carrier to a delivery confirmation receipt with the signature proof. Since the standard proof of delivery required by the payment processor dispute rules may not have been sufficient, the chargeback team worked together with the merchant, carrier, and payment processor teams to carefully analyze and gather all additional compelling evidence to refute the customer claim. With the merchant’s cooperation, the chargeback team even collected a video recording of the merchandise being packed and shipped.
During the investigation the merchant confirmed that magazines and catalogs were no longer shipped by mail—a change that was made two years prior. The carrier investigation report was also provided as additional evidence to make the chargeback representment more powerful. The combined evidence made a strong case that the customer received her merchandise and was issuing a false claim.
Representment outcome: The first chargeback representment was decided in the merchant’s favor. However, the customer did not give up. The customer maintained her claim of non-receipt and filed a second dispute, which sparked a pre-arbitration chargeback cycle. The pre-arbitration chargeback claim was again challenged by the chargeback team using the documented compelling evidence. The credit card issuer did not dispute the transaction further in arbitration and the case was ultimately won in the merchant’s favor.
From this real life example, it’s clear the lengths some customers will go to commit friendly fraud. It also demonstrates the time consuming, labor intensive nature of fighting friendly fraud. It requires not only knowing your customers, but knowing when to fight. And once the battle stance is struck, merchants must be prepared with fact-based, compelling evidence—because right or wrong, the burden of proof falls to the merchant.
Not all customers are created equal… How well do you know yours?
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