March 3, 2014, 11:35 AM

Not-so-friendly fraud

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"With the growth of the Internet, you have a significant amount of transactions that are completely faceless, and it's easy to contact your [card issuer] to get what amounts to a refund," Eaton-Cardone says. "We are not talking about consumers who are vicious or malicious. They just have no idea that doing this has a consequence [for merchants], that a chargeback is black mark on a merchant's record, and that a merchant can get a fine."

When a merchant decides to challenge a chargeback—a process that involves not only the merchant but its processor, the consumer's issuer and the relevant payment card network—it must provide evidence that disputes the cardholder's claim. Claiming they never got their order is one of the main excuses consumers use when lodging complaints against e-retailers, experts say. If the e-retailer can show evidence that the package was delivered to the cardholder's shipping address and signed for, it may win its claim. "The seller has to create an impression that the buyer would fail in the dispute," says Susan Oliver, vice president of risk at online payment processor Inc.

But not all retailers want the expense of requiring delivery confirmations on all orders. UPS Inc. charges $2 for delivery confirmation, according to its 2014 rate card—that service includes an e-mail sent to the shipper with the delivery time and date, the name of the recipient and, in the event of a return, the reason for it. If UPS has to collect a signature with delivery, the cost can be as high as $4.90. And those rates keep going up: UPS increased its delivery confirmation charge by 12 cents in 2014, and increased its charge for collecting an adult signature by 15 cents.

Another way to build a defense against chargeback complaints is to add a layer of customer service. Retailers selling pricey items, such as jewelry and electronics that can easily be sold for cash, may want to contact consumers via phone or e-mail to verify purchases and deliveries to reduce the risk of friendly fraud, experts say. Other sellers can send e-mail confirmations immediately after delivery, including such information as the retailer's customer service number, the purchase amount and other information that backs up the transaction. According to Internet Retailer's, 183 e-retailers in the Internet Retailer 2013 Top 500 Guide offer estimated delivery dates to customers, and 337 offer shipment tracking—little reminders, experts say, that could help prevent forgetful consumers from later disputing transactions.

Retailers also can simply make their terms and conditions clear on their e-commerce sites to help plant the idea in a shopper's head that this is a real transaction that can't be ignored. Having a prominently displayed customer service number that is answered 24/7 can also reduce the chances that displeased or semi-devious consumers will contact their banks to dispute charges. "As many card issuers have moved to web-based customer service, it's easier to log on and open a dispute case," Oliver says. "Consumers go for the path of least resistance."

One smaller, newer online retailer based in Chicago who sells homemade arts and crafts via the Etsy Inc. online marketplace, among other sites, has yet to experience any major fraud with her online customers. But one instance of friendly fraud from a year ago—a customer claimed to have not ordered a $25 item, forcing the seller to eat the charge—led her to include brief, handwritten thank-you notes on her business cards with shipments. Her hope is that the personalized touch would jog any faulty memories and make sure customers know there is a person behind the products.

The larger e-retailer who believes other retailers' liberal return policies spoil consumers plans to take a stab at the "more information" approach. The merchant says it will soon prominently display information about its 30-day return and refund policy on its site.

Those steps won't deter professional criminals. But these retailers are hoping that friendly messaging can persuade otherwise law-abiding shoppers from trying their hand at friendly fraud.



E-retailers hope CVV2 codes save them from fraud

So-called "friendly fraud" will continue to vex e-retailers for the foreseeable future, but the threat of account takeover looms even larger.

Criminals who steal consumer payment and personal data, then use that information to place orders, account for 40% of e-commerce fraud, according to a recent Forrester Research Inc. report. The data breaches that hit retailers including Target Corp. (with information of up 110 million consumers affected), The Neiman March Group Inc. (some 1 million consumers) and Michaels Stores Inc. highlight the danger. And while retailers and processors can give no firm evidence that those breaches have resulted in escalated fraud for e-retailers, web merchants have also come under attack: Easton-Bell Sports in January says criminals broke into a server operated by a vendor that contained web shoppers' payment information.

The burdens of such crimes are potentially significant: a research note from Wells Fargo Securities in February estimated that the Target data breach could cost the chain between $330 million and $550 million. Unaffected merchants could suffer, too. 50% of consumers who are victims of fraud say they would avoid "smaller" online merchants—those with less than $1 million in annual sales—while 19% would avoid larger e-commerce operators such as Inc. and eBay Inc., according to the "2013 LexisNexis True Cost of Fraud Study."

Top 500 e-retailers are aware that a data breach anywhere negatively affects them all. "When a breach happens it can lead to consumer fear around the safety of their personal information," says an executive of one web-only merchant who requested anonymity. The executive—like others contacted by Internet Retailer—reported no special alerts from his processors, nor any notable increase in fraud in the wake of the breaches. Perhaps that is because he relies on CVV2 codes printed on the back of payment cards for protection. CVV2 codes are three or four digit numbers many e-retailers require consumers to enter with their payment details. They are supposed to help lower the risk of fraudulent transactions because having the codes is an indication that the consumer physically has the card in hand.

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