Every year we see an increasing number of people buying or selling online. In 2016, Australians completed 8.1 billion card transactions, totalling $714.5 billion. By 2020, forecasts project that online shopping will have doubled since 2015 and account for 15 per cent of all retail sales globally.
However, as more people shop online, businesses not only must contend with traditional fraudsters, they also face increased rates of chargeback fraud, also known as friendly fraud. While it may sound harmless, friendly fraud is anything but that. There are several salient points that small businesses need to be aware of in 2018 to deal with their not so friendly customers.
When “friendly” fraud isn’t so friendly…
Friendly fraud occurs when a customer makes a purchase online with their credit card, receives the good or service, and then contacts their card-issuing bank to dispute the charge, often claiming they did not make the purchase. The act is particularly problematic for businesses, because not only do they lose the merchandise but they also experience a damaging drain on revenue from the loss of the sale and the cost of responding to disputes.
This type of fraud is often called “friendly” because the customer makes a claim that seems believable. However, if this type of fraud were to occur in a brick-and-mortar shop, it would be called theft or shoplifting. With e-commerce on the rise, it’s vital that both big and small businesses are aware of how to spot it and what steps to take to prevent it.
The tell-tale signs of friendly fraud
Ever had a customer report that an item was undelivered or that it didn’t match the product description? While these may seem like harmless claims, they can often be indicators of a fraudulent dispute. When looking to identify friendly fraud, merchants are likely to be far more successful when they know who their customers are and understand their buying habits. These insights help merchants determine whether the behaviour is typical or unusual for a specific customer.
Here are some examples of customer fraudulent claims:
- Reports that the item wasn’t delivered
- States that the item purchased doesn’t match the online description and now they don’t want it
- Tells their credit card issuer that they returned the item, but a refund was not processed
- Says they cancelled the order but it was still sent to them
- Claims they don’t remember making the purchase so their credit card must have been compromised
It is possible that these claims are valid, which is why it can be so difficult for card issuers to distinguish between fraudulent and non-fraudulent chargebacks. As a result, they often refund both types of customer requests, to the detriment of merchants and their own bottom line. This is why it is important to have key mechanisms in place to limit the chances of it occurring from the start.
Preventative strategies for friendly fraud
Being aware of tell-tale signs of friendly fraud is one step towards a more vigilant and effective strategy to prevent it; however, there are best practices businesses can employ to minimise its impact:
- Check the billing address: Verify that the buyer’s billing address matches the address associated with the credit card before sending the merchandise. Mismatched addresses, particularly on international orders, can be an indicator that something is amiss.
- Authenticate at every stage: Go above and beyond to prove authenticity at every point of the transaction and delivery of the product or service. For example, using a shipper that tracks delivery and confirms signature can ensure the process follows a reliable pattern.
- Over-communicate with customers: Personalise the sale as much as possible and strive to over-communicate with your customers. Customers may be less inclined to make a claim against you when you’ve made an effort to communicate that their satisfaction is your main concern, and they will come to you first rather than to their issuing bank if they decide to dispute a transaction.
- Be clear on returns: Clearly state your return policy on your website to avoid confusion and discourage fraudulent behaviour. This includes any product guarantees, time restrictions, condition requirements, or fees.
- Analyse your sales records: Analysing your customer sales records can help identify customers who dispute transactions on a regular basis, and enable you to decide whether to stop doing business with them or contact them about the issue.
As more payment methods become available to facilitate faster online transactions, security protocols and capture technologies can become outdated. To this end, e-commerce fraud has grown dramatically in areas like new online payment methods, account takeover and payment fraud, resulting in higher rates of friendly fraud across the board.
Innovations in the payment industry – such as merchant-issuer collaboration in the sharing of transaction data – are fast becoming the new standard in fraud and chargeback prevention. Merchant vigilance, however, must remain a staple in customer service best practices to help ensure revenue protection and customer retention.
While friendly fraud can be difficult to identify, there are indicators and steps you can take to help identify when fraud is happening or about to happen. The growth of e-commerce makes this battle inevitable, so remain vigilant.
About the author
Andrew Reszka is the Australia Lead with Verifi, a global provider of end-to-end payment protection and management solutions.