As a child, my parents taught me about responsibility and liability. If we went out to eat at a restaurant, I had to eat what was in front of me as long as the food was prepared well and came out in a timely manner. If, by the time the food arrived, I no longer wanted to eat what I had ordered, my parents still paid for the meal and I learned an important lesson: We are responsible for our own decisions. As long as the restaurant met a certain standard of excellence, my parents couldn’t hold them liable for doing their job well.
It’s one thing when you’re face to face with a merchant. But when you introduce ecommerce and card-not-present (CNP) transactions into the mix, these simple life lessons get thrown out the window, and commerce becomes a technological Lord of the Flies.
According to dailyfinance.com, “Online merchants lost $11.8 billion to cases of ‘friendly fraud’ in 2012.” Friendly fraud is where a customer issues a chargeback (in some cases deliberately), claiming an item was never received or that they never made the charge. This can feel like a victimless crime, but merchants are paying the price in lost products, chargeback fees, increased chargeback rates and the ever present specter of losing their right to process credit cards.
Most writing on the subject tells you that friendly fraud is a problem and shows you how to fight these chargebacks. But I am here to state that we are fighting friendly fraud all wrong. We let consumers, issuing banks, acquirers and the card schemes off the hook for this continued consumer protection loophole. This needs to stop, and we need to take action.
Let’s start with the term friendly fraud. I believe that fraud is fraud and everything else is a valid transaction. The police don’t have a separate friendly crimes division, and neither should merchants. If we shift our perspective on what we currently classify as friendly fraud, then the conversation about the transaction changes. If a consumer forgets a purchase, doesn’t like the product, or their child buys an app—this is not fraud. These are issues that can and should be addressed, but merchants should not be repeatedly punished for consumer behavior. However, when a consumer deliberately tries to gain another product by claiming they did not receive a product—that is fraud. There is nothing friendly about an intentional and malicious attempt to steal from merchants and issuing banks.
By shifting the rhetoric, we can tackle other issues related to this myth of friendly fraud. If we assume that transactions are either valid or fraudulent, then we can address them from what I classify as behaviors.
Merchant Behavior
Do you have a reasonable refund policy? Does your physical product match the description or pictures on your website? What is your digital or physical fulfillment time? Do you have a parent company and the descriptor on the credit card statement differs from your web store? Are you Comcast and you have a known history of poor customer service?
Now, I do not want to shift blame from those merchants with unscrupulous behaviors including misleading refund policies, impossible to reach customer service, poor service resolution and a history of bait and switch business practices. Chargeback rights were made to protect consumers from stubborn and deceptive merchants. Chargebacks related to disingenuous merchant behaviors address valid complaints from consumers.
To fix these issues, all you need to do is look at industry best practices and make adjustments to your current business model. And if you refuse to make these changes, chargebacks (and their consequences) should be placed at your front door.
However, if you are a good merchant with fair, trustworthy and transparent policies, you will still be hit with the same chargebacks as your duplicitous brethren. Valid transactions with subsequent chargebacks need to stop being called friendly fraud. When we move away from this term, we can start to win these chargebacks because we approach them as valid transactions.
Consumer Behavior
According to Transaction World, “The large majority of cardholders (81%) stated their actual reason for initiating a chargeback was due to convenience (‘they didn’t have time to contact the merchant’).” When the average consumer is using a chargeback as a convenience method, the system is broken. Good merchants should not be penalized because a consumer didn’t have time to unlock their smart phone, call the merchant, and solve the issues themselves. There is an element of culpability that is missing from this equation.
For non-fraud consumer behavior, it is worse that a merchant is penalized. A simple call would alleviate most consumer issues, but instead the issuing banks and cardholder will file a “does not recognize” chargeback or just a straight “fraud” chargeback. And once the consumer receives the information from the merchant, they state “Oh, yeah! I did order that product.” While the merchant may receive his money back, the simple time and effort to fight the chargeback is not worth it in many cases. According to Verifi, “It’s estimated that for every $100 in chargebacks, your true cost is $308 in wasted time, expensive fees, penalties or additional losses of goods and services.”
On the flip side, when a customer looks to gain another Amazon package by stating they did not receive the original (when they assuredly did), this is fraud. There is nothing friendly about those circumstances. If a customer looks to get their money back and keep the product then it is true fraud. There is a malicious and deliberate attempt to steal from a merchant. In these chargeback cases, the burden of proof is on the merchant. However, even if a merchant wins the chargeback, the customer can still move toward arbitration and the outrageous fees associated with it. So even though the consumer is defrauding the merchant, it is the merchant who suffers.
This is like punishing the child who is bullied in school because the bully broke their hand while punching the child. There is no recompense or restitution for the merchant in these situations. In turn, this leads to the merchant offering poor customer service or a refund policy that is ineffective, and the cycle continues. And again, even in a win, the chargeback still counts against the merchant’s total chargeback rate.
All of this leads to the last behavior that needs to be addressed—industry behaviors.
Industry Behavior
For merchants and consumers to change their chargeback practices, there needs to be changes at the top. Specifically, issuing banks need to hold their cardholders accountable for their actions. There needs to be consequences for being a serial chargeback customer. Chargebacks are not refunds, and they should not be used in place of them. The penalties placed on merchants for deceptive or forgetful consumer behavior is outrageous. This is tied directly to the issuing banks who don’t want to hold their customers accountable.
Moreover, issuing banks often file chargebacks under the wrong codes (intentionally or not) or don’t ask their customers to contact merchants first. This practice need to be addressed.
Finally, there needs to be an overall shift in the relationship between credit cards and ecommerce from the rule makers. Almost two years ago, there was an industry shift in accepting compelling evidence for digital and mobile transactions—but our digital industry evolves every day with every customer.
The card schemes are trying to play catch up and there will be some changes in the near future. When a merchant supplies compelling evidence during representment, the cardholder will need to provide a detailed explanation about why they are continuing to dispute the transactions. And the issuing bank must prove they contacted the customer and reviewed the compelling evidence with them. These are excellent first steps toward winning a friendly fraud chargeback.
The Next Steps
So if we can shift the friendly fraud paradigm, and we start holding merchants, customers and the industry accountable, what are the next steps? The card schemes and issuing banks need to work together to determine liability and what that means in terms of excessive chargebacks.
Merchants should be fined and held accountable for their actions when they are at fault. But there should be recourse if it is just a customer forgetting a purchase, or not wanting to call for a refund, or if they are trying to commit chargeback fraud. And this is just the tip of the iceberg.
This will not be an easy fix and it’s not going be solved in this blog post. But our industry needs to start this conversation. We are past the point where we need to learn how to fight friendly fraud. We need to identify the root causes and shift liability where needed. The time for personal culpability starts today—only then can we make real ecommerce change happen.
Keystone
As more people purchase everything from the Internet (and they will), the need for consumer and merchant protection is imperative. Additionally, the need for merchant, consumer and industry responsibility is even greater as traditional commerce changes. If we can’t figure out a way to make this work then everyone will be a victim and the only winners will be actual fraudsters. We can either learn to live together or die alone.
Tim Russo is the Fraud Prevention Team Leader at cleverbridge
