It’s no secret that in the weeks following the holiday spending period, many retailers are overwhelmed with returns, refund requests and chargebacks, many of which some are categorized as ‘friendly fraud’.

• Chargeback and friendly fraud will cost merchants upward of $25B this year.
• Merchants lose around $2.50 for every dollar of friendly or chargeback fraud
• A cardholder that successfully files a chargeback is nine times more likely to file additional chargebacks.
• Merchants must deploy a multi-pronged fraud prevention strategy to minimize chargeback losses.

Friendly fraud is a growing phenomenon that occurs when a customer disputes a charge on their credit card account via their card issuer without contacting the merchant for resolution. With massive pressure amongst banks  to maintain customer satisfaction levels, it can be simple for an authorized cardholder to call into question legitimate-appearing charges on their credit cards, pushing the issuing bank to force a refund under the impression that the merchant made an error.

When a card issuer provides a refund to the customer, the merchant is not only losing the revenue from the sale, but they have now also potentially lost the merchandise in addition to the bank’s fees for the chargeback. It’s a massive cost to merchants; it is estimated that for every $1.00 in chargebacks cost the retailer around $2.50 for the fraudulent charge. At the current rate, friendly fraud will cost merchants upwards of $25 billion this year.

...it is estimated that for every $1.00 in chargebacks cost the retailer around $2.50 for the fraudulent charge. At the current rate, friendly fraud will cost merchants upwards of $25 billion this year.

Friendly fraud charges are typically legitimate charges but the consumer is confused about the transaction and the dispute is some type of misunderstanding. This means that if the merchants can communicate with them before they dispute the purchase, the dispute can be avoided. The most common types of friendly fraud include:

1. Buyers remorse: post holidays, faced with the bills, many buyers initiate chargebacks for purchases they regret. Since it’s less emotionally challenging to simply dispute a charge with their bank than to work directly with the retailer, the chargebacks come in with little opportunity to address directly with the customer.
2. Unauthorized charges by household members: a great example is when a household member makes charges to a shared account such as via Amazon or in-app purchases on mobile apps.
3. Billing confusion: the cardholder doesn’t recognize a charge on their monthly bill from a merchant that perhaps has a different DBA name.
4. Prohibitive cancellation or refund process: many services have very labor intensive or persnickety cancellation processes which can result in a consumer opting to handle the cancellation via the credit card company vs the merchant. Studies show that four out of five cardholders admit to filing at least one chargeback out of convenience.

In addition to these cases of friendly fraud has been an increased level of what is referred to as chargeback fraud; this is of malicious intent by the cardholder who receives the goods and then claims to have not received them, demanding a refund from the merchant. With the anti-liability policies maintained by many card issuers, the cardholders are generally taken at their word.

This means that the issuer marks legitimate transactions as fraudulent – which initiates the burdensome and expensive chargeback process. Not only that but now the merchant suffers the loss of the revenue and the product, shipping costs and chargeback fees from the card issuer; it’s painful to say the least. And to add insult to injury; when a customer successfully conducts chargeback fraud, they will often return to the same merchant to undertake additional fraudulent orders to chargeback.

Online merchants must now look for ways to reduce both of these instances of fraud, in order to contain losses and negative strikes to their bottom line. So what can be done to minimize chargeback and friendly fraud?

• Address all chargebacks providing the card issuer with proof that this was an authorized sale.
• Understand card issuer chargeback reason codes in order to see patterns or weaknesses in your checkout or refund process.
• Ensure you have a clear and simple way for customers to make returns. According to recent research, a business will hear from only 4% of dissatisfied customers—the remaining 96% should be considered at risk of filing a chargeback.
• Ensure that the descriptor that customers see on their credit card bills is clear and easily recognizable.
• Implement an ID verification for high ticket and high risk transactions.
• Provide shipping updates and create records of delivery to prove that goods were delivered.
• Flag customers that have requested chargeback and either block future sales or, require additional verification before shipping goods.

At BlueCheck, we help merchants address chargeback and friendly fraud by providing identity verifications using a combination of AI, publicly verified records and analysis to assess the legitimacy of a purchase. BlueCheck’s network also ‘follows’ a user between merchants in both PoS and e-commerce environments to verify transactions and to deter fraud across any merchant in our network. BlueCheck’s system is fully customizable to trigger verifications based on risk, whether the potential risk is the product, or the buyer. BlueCheck verifies buyers in real-time, in the background, with no added screens or data collection added to the checkout process in 95+% of transactions.

Learn more about the BlueCheck ID verification platform, or feel free to contact us with questions or to have a conversation around identity verification. It’s our passion and we’re always happy to chat.

-- Team BlueCheck (merchant@bluecheck.me)