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E-retailers look for ways to combat consumers disputing charges for web purchases.
Talk to an e-retailer about so-called "friendly fraud" and you'll likely come away with a version of this: Some consumers, accustomed to the generous, 90-day, few-questions-asked online return polices offered by retailers such as Wal-Mart Stores Inc. and Costco Warehouse Corp., think little of using a product they've purchased, then returning it to the merchant for a refund. The merchant absorbs the loss, all but certain that challenging it will result in wasted time and eventual defeat.
One U.S.-based e-retailer, who sells both in the United States and abroad, makes that complaint with vigor. Like all e-retailers interviewed for this story, this merchant demanded anonymity so as to not make trouble with payment card processors or issuers, or customers. This relatively small web merchant estimates that friendly fraud accounts for 40% of its chargebacks and more than $100,000 in lost revenue annually.
While hardly "friendly," what's generally referred to by retailers and the payments industry as friendly fraud occurs when consumers dispute seemingly legitimate charges made to their credit cards. This may happen for various reasons: a consumer may want to wriggle out of paying for product, may be unaware another household member made the purchase or may have forgotten about a transaction he made and think it is an illegitimate charge.
Friendly fraud accounts for about a fifth of the fraud experienced by online merchants, according to a recent report from LexisNexis. Experts say that lowering that fraud rate requires e-retailers to figure out ways to communicate better with customers, clarify and communicate customer service polices and sometimes fight back.
Enough merchants have done so, and have shared their tactics, that one payments expert anticipates positive movement in the coming years. "It will decrease," predicts Karisse Hendrick, e-commerce fraud and payments program manager, Americas, for the Merchant Risk Council, a Seattle-based industry group that promotes e-commerce payment security. She says improving communications between retailers and consumers, along with an improving economy, will make fewer consumers seek chargebacks.
She bases her optimism largely on the talks she regularly has with web merchants about fraud issues. Nonetheless, those merchants remain very concerned about friendly fraud, she says.
In a 2013 online fraud report from CyberSource Corp., a payment security and payment systems provider to dozens of e-retailers ranked in the 2013 Top 500 Guide, 59% of surveyed merchants, all of which had annual e-commerce revenue of $25 million or more, reported that they thought friendly fraud had increased over the past two years. Friendly fraud ranks third—behind account takeovers and "clean fraud" (the industry term for fraudulent transactions that appear legitimate and slip past merchant checkpoints)—among perceived fraud threats.
Survey results in the "LexisNexis Trust Cost of Fraud Study" from September 2013 suggest friendly fraud in the United States accounts for 18% of fraud suffered by merchants. That's unchanged from 2012 and down from 19% in 2011 and 20% in 2010, when the economy was worse than it is now. While the friendly fraud rate is relatively steady, this type of fraud still poses a significant risk to e-retailers.
Online merchants can incur chargebacks for instances of friendly fraud, and for other reasons, including legitimate disputes over purchases the retailer doesn't resolve to the consumer's satisfaction, transaction errors and instances when thieves steal a consumer's identity and make purchases. A friendly fraud chargeback, however, typically looks like this: A cardholder calls his card issuer and disputes a charge made to his account. That bank debits the charge from the merchant's account. The bank then informs the retailer of the chargeback, which the retailer can accept or dispute. A merchant who disputes the chargeback then gathers evidence that shows the transaction was legitimate and sends its version of the case to the processors and issuer. If the merchant wins, its account is credited for the original amount. "The merchant can be credited the amount only if the dispute is found in its favor, after presenting the necessary details that the cardholder was aware or participated in the transaction," Hendrick says.
Based on her research, Hendrick estimates that friendly fraud can account for between 25% and 40% of e-retail chargeback volume. Another payments executive, Monica Eaton-Cardone, co-founder and chief operating offering of Chargebacks911—which for a monthly fee starting at $500 helps retailers avoid and challenge chargebacks—says that for some clients, up to 70% of their chargebacks stem from various forms of friendly fraud.
Merchants are becoming more diligent about policing chargebacks, Hendrick says. "Merchants have been looking under their couch cushions for more money over the past couple of years," she says. And any chargeback activity costs retailers more than the original payment if it isn't resolved in their favor. Payment processors charge merchants fees ranging from $5 to $25 per chargeback. "If a merchant has an overall chargeback rate in excess of 1% of its sales volume [each card brand has different criteria], a merchant can be assessed 'excessive chargeback fees' that can go into the hundreds of thousands of dollars," Hendrick says.
E-commerce's very nature makes friendly fraud tempting for consumers, not all of whom consider themselves thieves, according to Eaton-Cardone and others who have asked consumers why they commit it. Subscription-based e-retailing—where consumers who opt in pay a regular fee to receive regular shipments—for example, has generated a rise in chargeback activity. Consumers can easily say they forgot to cancel a shipment, and take up their complaints with their card issuers, which, merchants grumble, are loath to rule against cardholders. Merchants interviewed for this story generally expressed fatalistic attitudes toward challenging chargebacks, all but certain they will lose. (Neither the Visa or the MasterCard Worldwide payment card networks agreed to comment for this story.)