Chargebacks—demands by a credit card provider that a retailer refund a disputed or fraudulent transaction—cost businesses of all sizes a tremendous amount of money each year. Not only do these entail reimbursements to the customer, but also any fees related to the investigation into the claims.
A 2016 LexisNexis True Cost of Fraud Study found these costs are rising annually.
“On average, U.S. merchants reported an 8% increase over last year in the cost per dollar of fraud losses, from $2.23 to $2.40,” which “means that for every dollar of losses, merchants are losing $2.40 based on chargebacks, fees and merchandise replacement,” it states.
It's important, therefore, to understand the difference between the two main types of fraud: chargeback fraud and friendly fraud. Although these terms are often used interchangeably, they do harbor slight distinctions.
Chargeback fraud refers to a situation in which a consumer intentionally requests a chargeback on a legitimate purchase.
As reported in a 2015 survey by software company Trustev that included 1,000 American consumers, "7% of consumers have lied about the condition of a product so that they could return it.” Furthermore, 24& of participants responded they either weren't bothered by other consumers committing such acts, or actually believe it is okay to do so.
After the EMV liability shift in 2015, there was a significant increase in chargeback fraud. According to an August 2016 article by news site Credit Union News, “chargebacks for card-present transactions increased 50% following the Oct. 1 EMV liability shift.”
While there wasn’t a definitive answer for why this occurred, many speculated that there were two main reasons for the jump. The first was that fraudsters were specifically targeting businesses that had yet to adopt EMV technology. The second was that people were intentionally disputing legitimate purchases that were made with the magnetic stripe of their credit cards, rather than the EMV chip. Businesses were losing a lot of money as a result of these chargeback claims, and ultimately, filed a lawsuit against card associations Visa and MasterCard.
As discussed in an October 2016 article by IT online resource Computerworld, some of these lawsuits are still on-going. A March 2017 article by online legal news site Law360 reports that more continue to be filed, with merchants claiming Visa and MasterCard, as well as American Express and Discover, "conspired to unlawfully shift fraud liability to merchants, despite complications in switching to a new security chip system."
Friendly fraud involves a consumer who requests a chargeback on a purchase he or she doesn’t recall making. In these cases, the consumer is committing fraud, but doesn’t actually realize the purchase in question is legitimate. This sometimes happens if a family member, such as a spouse or child, buys something and doesn’t inform the credit card owner. Other times it occurs when a consumer simply doesn’t remember making the purchase.
This type of fraud is also on the rise. ATMmarketplace.com, a news outlet reporting trends and events in the ATM industry, stated in a June 2017 article that current statistics suggest this could be a “record year” for card fraud loss. While there are several contributing factors to this increase, including a three-year delay in the EMV liability shift for gas stations, one particular explanation highlighted by the article is the rise of friendly fraud.
How can merchants tell the difference?
It can be difficult for merchants to decipher between a chargeback claim, in which a consumer is being dishonest, and another in which he or she is telling the truth. How could you possibly prove someone is lying if they honestly just don’t remember? It certainly puts merchants in a tricky spot, and there isn’t’ necessarily a foolproof way to prevent all such cases of fraud.
Yet there are steps you can take to help decrease the amount of chargeback claims your business receives. This includes having an excellent customer service department that quickly responds to customers who contact the company first, before their credit card issuer. This way, you can resolve the problem as quickly as possible without having to pay any chargeback fees.
Consistently and efficiently keeping track of customers' order histories and buying patterns could also assist in reducing the number of chargeback claims against your business, saving you time, money, and stress.
Find out more about what exactly chargebacks are HERE.