Chargebacks and “Friendly” Fraud


The American Dream has long powered the aspirations of citizens with the idea that you can be whatever you want to be, work wherever you see fit, and succeed. Some might argue that with the growth of e-commerce, the American dream is now more attainable. But chargebacks rarely enter the preliminary calculations.

Let’s take a pair of hypothetical entrepreneurs. E-commerce’s seemingly low barriers to entry lured Mary and John Miller. As savvy marketers, they created a distinctive online retail presence for their brand. Slowly, they persuaded customers to shop with them, and in time, had a profitable online business.

While the promise of growth affiliate marketing enticed the Millers, what they didn’t know is that this kind of marketing—if not carefully monitored—can attract higher levels of chargebacks. Just as they were ready to really celebrate, their credit card processor informed them that no money would be deposited into the business’ bank account for the past week’s sales because a few customers had filed chargebacks. Later, the bank closed their account.

Many online merchants seek customers through affiliate advertising. The problem is that merchants entering the space lack experience and education in the affiliate space. Without understanding the mechanics of this method, one can quickly fall victim to affiliate fraud, and the consequence is chargebacks and the loss of credit card services.

Fortunately, the Millers were smart businesspeople who quickly learned from their mistakes and re-invested in their business with new defense mechanisms to ensure such fraud couldn’t harm them again. So they were stunned when chargebacks spiked again.

The Silent Scam
This time, it was a new type of fraud—“friendly” fraud, a scam that merchants never see coming. It is a chargeback filed by a consumer who attempts to get something for nothing by calling their bank and claiming that a card-not-present transaction was unauthorized.

Estimates from Lexis Nexis say that merchants dispute only 25 percent of all illegitimate or friendly fraud chargebacks. And friendly fraud has exploded in recent years, since the mechanism penalizes merchants who don’t have the time or resources to defend themselves by fighting these types of claims. According to Visa, friendly fraud accounted for $11.8 billion in chargebacks in 2012 alone—six times the estimated $2 billion in losses resulting from identity theft.

Millions of merchants have fallen victim to friendly fraud, despite every intention to grow their businesses the right way. Empowered by evolution of new transaction channels and the “customer is always right” adage, more consumers are taking advantage of what amounts to online shoplifting. And the consequences will be rare until more merchants take a stand.

The only defense against friendly fraud is a good offense. Employ best practices: Deliver fast response times in customer service needs, offer extended support hours, maintain delivery receipts for tangible products, define refund and cancellation policies clearly, use a clear credit card descriptor, and market high-quality products at fair prices.

Establish policies for monitoring identity theft and affiliate fraud: Review online traffic, survey consumers, use fraud detection software, and take advantage of prenotification alerts. And dispute illegitimate chargebacks, either in-house or through a chargeback management firm.

With the speed of delivery increasing to meet the need for instant gratification, there is no time to wait for processes to take their course. Merchants have to fight to stay afloat in this industry. And chargebacks are a never-ending battle.

Charegbacks911 cofounder Monica Eaton-Cardone launched the company September 2012, after struggling to find a solution to chargeback issues for years as a merchant. Chargebacks911 works with clients to help keep dispute rates down and retain the ability to accept credit cards. For more information, visit www.chargebacks911.com.