Boost your bottom line with Fraud.net’s Friendly Fraud Solution.
Digital merchants around the world are struggling to maintain profitability. Stiff global competition is forcing you to hold the line on pricing, even though costs are rising. You also need to provide a superior customer experience, however, administration of returns and refunds is costly. But are you fully accounting for the impact of fraudulent chargebacks? Online companies can lose as much as 25% of their profits to first-party chargeback or “friendly” fraud. In an already low-margin business, ignoring friendly fraud is not part of a sustainable business strategy. You need a friendly fraud solution that is friendly to your bottom line.
Types of Chargebacks
Chargebacks, a reversal of a transaction performed by the cardholder’s bank, fall into three main categories:
- Criminal or Third-party Fraud – This chargeback happens when stolen card numbers are used to purchase items. The spike in criminal fraud during the pandemic drove chargebacks higher as impacted consumers sought to get reimbursed for fraudulent transactions.
- Legitimate Consumer Disputes – These occur due to problems with sellers, including product quality, shipping issues, or other disagreements requiring consumers to initiate a chargeback through their card company.
- Friendly or First-party Chargeback Fraud – Wedged between the above two categories is our focus – friendly chargeback fraud. Defining friendly fraud can be tricky as there are many interpretations. We will define it as – fraud perpetrated through the chargeback process by an individual post-authorization and knowingly with their own card. The term is a misnomer; there is nothing “friendly” about the action. Some examples include:
- Calling the issuing bank to falsely claim that a delivered item was not received.
- Falsely informing the card issuer they returned a product and never received the refund.
- Telling the issuer that a working product ordered online is defective.
Friendly fraud can defy conventions of preventative fraud models and superficially appear like a legitimate transaction. The tactic can confound merchant’s traditional anti-fraud measures, refund and return policies, and dispute resolution process.
Background and Scope
Our current issues with friendly fraud go back in large part to the early days of credit cards. The card networks wanted to discourage companies from allowing card-not-present (CNP) transactions, so they charged higher interchange rates and imposed full liability on them for all fraudulent transactions.
But then the pandemic created a permanent change in consumer behavior, as CNP transactions have become nearly half of all card transactions, and are expected to overtake card-present transactions by 2023. These dynamics set the stage for a substantial increase in friendly fraud.
Some experts predict friendly fraud will be a $100 billion issue for online merchants this year. This is a doubling from the pre-pandemic levels, primarily due to the increase in online purchases.
Bottom Line Impact
Friendly fraud can take a 25% bite out of online merchant’s profits. To address the issue, you first need to understand the impact of friendly fraud on your business. Gartner’s Total Cost of Fraud model provides a solid starting point. It uses three components to determine the real impact on your business:
Fraud Losses + Tools & Personnel + Customer Lifetime Value Impact
Fraud losses cover not only the impacted products or services but also the additional fees and costs in administering fraudulent chargebacks, such as:
- Chargeback fees
- Additional shipping charges
- Additional operational costs
- Potential card network termination
If you are already operating with thin margins, you can not afford to let chargeback criminals drain 25% of your hard-earned profits.
Legacy Systems and Legacy Mindsets
Most companies are working with legacy point solutions to try and combat chargeback fraud. Typically these tools do not integrate, leaving gaps and silos in their coverage of the issue.
Plus, they are often inflexible, unable to adjust to our rapidly changing economic environment and consumer buying behaviors. The systems are usually hard to work with, causing additional effort for fraud and IT teams. Their legacy rules-based models often create large manual review queues. In the end, isolated systems and data silos create opportunities for fraudsters.
Another contributing factor to the prevalence of friendly fraud is some companies’ reluctance to address the situation. They have invested heavily in improving the customer experience and fearing a backlash from their customers, do not want to make return and refund policy changes.
These firms bring an organizational mindset that friendly fraud is a “cost of doing business”, a nuisance, and therefore not worthy of analyzing the scope and impact on their bottom line. The result is that they do not attack the situation with the vigor required.
Fight Friendly Fraud with Fraud.net
Read more on friendly fraud, and how you can fight back in our eBook – “Fighting Friendly Fraud with Layered Defense and 3DS2“. With our team of experts and sophisticated technology, we can design a custom friendly fraud solution that meets your organization’s specific needs. To talk with our team on how to reduce friendly fraud in your organization, please contact us for a free demo.