Friendly Fraud Showing Increasing Growth In Europe
Online merchants in Europe do not view ‘Friendly Fraud’ as friendly at all, as it results in lost revenues, unwanted fees, goods being sold on fraudulently, and even banking restrictions.
Chargeback Fraud, to give friendly fraud its proper name, has seen growth of 41% in Europe. It affects merchants selling both digital and physical goods online, with those selling digital goods often more vulnerable as it harder to prove chargebacks are not legitimate.
So why friendly fraud? The customer’s perception of the damage caused by a chargeback is why it is known as friendly fraud, it appears to be a victimless crime. The figures involved are small on an individual basis but amount to significant sums overall – globally the figure is put at over $12 million per year. Furthermore those customers capitalizing on chargebacks don’t always fit the fraudster profile either; some appear to be ‘good’ customers who are exploiting a loophole, making it hard to prevent the initial transaction with fraud protection solutions.
In countries where online credit use is on the increase, for example in Germany where credit cards and charge cards posted the highest growth rates in transactions value and volume terms in 2015, merchants will also find themselves increasingly exposed to chargeback fraud.
This post serves to help explain what this means to online merchants in Europe, and what measures they can take to minimise their exposure.
What Is A Chargeback?
Merchants may be subject to a chargeback when a fraudster has obtained stolen payment card details, and the owner of the card discovers their card has been used without their permission.
They may also become a victim of fraud when a customer requests a chargeback fraudulently: having received the goods, but citing ‘non-delivery’, or claiming to have ‘returned the item’, or that they ‘never placed the order’ as the reason for this chargeback.
A chargeback process starts when a customer contacts the payment card company and disputes a transaction. The Issuing bank prioritises the cardholder’s interests and the merchant is assumed to be at fault.
58% of cardholders do not contact the merchant when instigating a chargeback, and 86% of chargeback claims are fraudulently placed.
When a customer queries a transaction the Issuing bank raises a RFI (Request for Information) to the Acquiring bank. At this point if the Acquirer or merchant does not respond to this request, the Issuer raising an official chargeback.
If they do respond with sufficient evidence to prove that the disputed transaction is either fraudulent or mistaken, the file would then be closed.
However, if this evidence is not forthcoming and the Issuing bank believes that the chargeback is valid the next step is a provisional refund to the cardholder, and the merchant account is debited for this amount and fees. Then the Issuer sends the transaction back to the merchant’s acquiring bank with a Chargeback Reason Code. This code is based on the customer’s reasons for requesting the chargeback and therefore could facilitate friendly fraud without due diligence from the Issuing or Acquiring bank.
At this stage the Acquiring bank reviews the refund request. If the Acquiring bank has access to the necessary supporting evidence to dispute the claim, they will send this back to the Issuing bank. This may be the case if the merchant uses a payment service provider with an acquiring arm like Secure Trading.
If the Acquiring bank does not have this compelling evidence they will forward the claim to the merchant. Often merchants will be unaware of the request for a chargeback until they receive a ‘forced refund’ from their bank, as over half of customers instigate a chargeback through their card provider without contacting the merchant first.
Disputing A Chargeback
The merchant can now decide whether to accept the claim or dispute it. Disputing the chargeback involves submitting supporting evidence usually within 5-10 days, including documents such as the returns policy, signed delivery receipts and email communications.
For merchants selling physical goods there are processes they can put in place to help militate against this type of fraud; such as keeping delivery receipts and ensuring that goods are signed for. But for merchants selling digital goods such as e-tickets, subscriptions, downloads, and software it becomes more difficult to prove that goods have been delivered.
Once the merchant has gathered the evidence and submitted it to their Acquiring bank it is then reviewed and re-presented to the Issuer. At this point there are three possible outcomes:
- The Issuer agrees that the chargeback is not valid and reposts the transaction to the cardholder’s account, and credits the merchant’s bank account.
- The Issuer does not agree and the chargeback stands.
- The Issuer instigates a pre-arbitration case and requests more evidence from the merchant. The case is then reviewed again with point 1 or 2 as possible outcomes.
As stated above chargebacks may also incur a fee, depending on your merchant bank. Additionally they can have an adverse impact on your business, potentially withdrawing your ability to take a particular type of credit card, or even closing your merchant bank account. Of course, if you do not respond to a chargeback request you will also face significant fines.
Some retailers of digital goods may also find that they are further out of pocket because their goods are then sold on secondary markets, impacting on future sales and their reputation.
How To Protect Your Business Against Chargebacks
Friendly fraud does not only cost merchants in monetary terms; it is also a lengthy process that takes up valuable time. Time that would be better spent on e-commerce growth instead of resolving fraudulent claims.
Therefore merchants should instigate measures to protect themselves from chargeback fraud. We suggest the following:
- Request card security codes (3 digit number on back of card) – to reduce risk of stolen card detail,
- Use 3D Secure – 3D Secure also offer merchants protection against chargebacks*,
- Use Address Verification Service (AVS) – to ensure delivery addresses are correct,
- Use a reliable shipping provider – to ensure goods are delivered,
- Use delivery confirmation – keep a paper trail for evidence of delivery,
- Use customer profiling – block known fraudsters.
If you are concerned about chargebacks and would like to speak to one of our consultants about how to grow an e-commerce offering and protect the business from friendly fraud, contact our team today – +44(0)808 273 6866 or [email protected]
* In cases where fraud is kept to an acceptable level, successful 3D Secure transactions cannot be charged back to the merchant.