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The abuse of the chargeback option has resulted in a “friendly fraud” epidemic harming not only merchants, but the very consumers the programs were designed to help.
Google Executive Chairman Eric Schmidt recently predicted that 100% of the planet will access the Web to purchase goods and services by the year 2020. It is no secret that the Internet has profoundly changed the way we do business. See, “Google Boss: Entire World Will Be Online by 2020,” CNN.com.
With over $450 billon transacted each day, geographical boundaries are melding into a borderless digital exchange. Face-to-face relationships and old-fashioned “brand loyalty” are sacrificed in favor of an anonymous, multi-level playing field where no-name-products share the same shelf space and compete head-to-head with timeless favorites. When it comes to the online marketplace, advertising dollars set a new ante and present an equal opportunity for any seller to win a share of consumer spending.
Brick and mortar stores are becoming more like display chests than sales departments ' places to browse, take notes and experience new products and environments. The Web is quickly gaining ownership over the actual transaction scene; where the winning sales are distributed among those merchants who either bought their way to the top of search engines or undercut pricing due to their non-existent overheads. Smart consumers go to department stores to shop, but make their purchases online ' and why not? When you can purchase the same product at a lower price, compare every brand with the click of a mouse, potentially save the tax and even get free shipping and returns all without leaving the office or your couch, it is understandable why many consumers have migrated to the virtual marketplace.
But there is one last advantage often overlooked by statisticians and expert economists; one that is equally compelling, and uniquely concealed by almost every participant in the transaction chain: the added consumer insurance that comes inherently with a card-not-present (CNP) transaction ' most recently coined the Friendly Fraud Chargeback.
A History of Chargebacks
The term chargeback is not an unfamiliar one: thrown onto the bandwagon with identity theft and consumer fraud, it accompanies most defensive banking propaganda. Visa and Mastercard spearheaded the concept in an effort to help eradicate the unforeseen issues brought on by the growth of e-commerce. With successful consumer education initiatives, they forged a new world with greater awareness and armed consumers with a weapon that promised not only to aid them in defense of consumer fraud and identity theft crimes, but which actually gave consumers the power to reverse charges made to their account ' providing a powerful offensive tool for consumers to use against merchants in battles over the proper exchange of goods and services.
The problem is that although this seemed like a great idea with little backlash potential at the time, the abuse of the chargeback option has resulted in a friendly fraud epidemic harming not only merchants, but the very consumers the programs were designed to help.
Not all chargebacks are nefarious attempts on the part of the consumer to steal goods and/or services from the merchant. In fact, relying solely on Visa and Mastercard reason codes (designated to classify the origin of a chargeback case), consumer fraud and identity theft incidents have consistently made up about 78% of all chargebacks initiated today. These two types of fraud are foreshadowed by malicious criminal intent to defraud cardholders. It can be safely stated, however, that despite their existence, the global Web today is a much more secure place to transact than it was just five years ago.
Chargeback Means 'No Time?'
Independent merchant surveys have revealed that the leading reason a cardholder initiates a chargeback is because he “did not have time to contact the merchant.” Lexis Nexis has countered that despite the reported reason code statistics per Visa and Mastercard, a large number of these claims are miscoded and related to the rising friendly fraud epidemic; publishing their findings that at least 25% of all chargebacks initiated were due to this actuality in 2009. See, “Retailers Lost $139 Billion to Fraud in the Last Year, According to LexisNexis Risk Solutions Study,” LexisNexis.com (Sept. 28, 2010) (The full study, “The 2nd Annual LexisNexis' True Cost of Fraud Study,” conducted by Javelin Strategy & Research, is available with lite registration at http://bit.ly/edveau.) Other independent sources report an alarming 70% of all chargebacks filed against online merchants are the result of friendly fraud, miscoded as the result of identity theft or consumer fraud. (Chargebacks911 reports that its CNP Merchant base averages over 70% friendly fraud chargebacks. Out of every 100 chargeback cases worked by Chargebacks911 for high risk e-commerce merchants, 71 are reported to be the result of friendly fraud. The merchant base analyzed for this report sells a range of products, including both intangible (such as insurance, travel and digital downloads/tech support) and tangible items ( i.e. , clothing wear/shoes, wellness products and cosmetics). The median transaction price was between $59.95 and $99.95, and 100% of the transactions originated through a website offer with click and accept terms and conditions. See also, “Prevent and Win Chargebacks and Minimize Refunds in Your Online Business,” Frank Rumbauskas, ezinearticles.com.)
With terms like “consumer fraud,” “identity theft,” “criminal intent” and “Internet scams,” it is interesting to note that a term resulting in an unfair consequence to the merchant (as opposed to the cardholder) has been coined such an unforgiving, not to mention confusing, term. A recent survey found that nine out of 10 e-commerce merchants didn't know the difference between friendly fraud and consumer fraud. (Chargebacks911 surveyed 50 random merchants willing to participate in its effort to help identify the key points of chargeback confusion. This was an opt-in survey which resulted in 45 of the merchants confusing the term friendly fraud and consumer fraud (believing they meant the same thing). Other survey points included asking merchants what they believed the Visa and Mastercard thresholds were, how these thresholds were calculated, what the difference was between a Processor and Gateway, and whether or not they believed it was illegal to contact a Visa or Mastercard customer who filed a chargeback (29 out of the 50, or 58%, believed they were not allowed to contact their customer to find out why a chargeback was filed).)
Friendly Fraud vs. Consumer Fraud
Friendly fraud happens when a consumer purchases a product, receives the goods or services related, and contacts his or her bank instead of the merchant to obtain a refund for a variety of reasons (most notable is an “unauthorized transaction” under the guidelines of card-not-present activity). Banks or credit card companies are not bound by any law to contact the merchant in the case where the transaction was made in a CNP environment. In other words, if the purchase was made through the Web, this qualifies for an immediate chargeback based on the subjective decision to believe the cardholder's claim.
Consumer fraud, by contrast, happens when a merchant engages in deceptive practices that result in the financial or property loss of the consumer. The consumer is usually under the impression that they are engaged in a legitimate business transaction until after the damage is done. Essentially, friendly fraud and consumer fraud are polar opposites, yet 90% of e-commerce merchants believe they are synonymous.
In the merchant processing industry, “guilty before proven innocent” is standard operating procedure. When a chargeback is initiated against the merchant, there is an irreversible fine and a negative statistic assigned to that merchant. The merchant also pays immediately for the cost of the transaction, while the cardholder reaps the reward of an often immediate, “temporary” refund (temporary only if the merchant spends extra money and time to diligently fight the case according to Visa and Mastercard guidelines and win back these previously debited funds). But even if the merchant fights the chargeback and wins back a portion of the funds, it often ends up a loser in more ways than one:
Most probable end result: The cardholder gets a refund, gets the product or service for nothing, and experiences no consequence while the merchant pays any and all fines and loses not only the purchase amount but the product as well. Statistically speaking, it is estimated that only 25% of all e-commerce merchants defend themselves against friendly fraud even though 100% become victims in today's society.
Defending Against Friendly Fraud
With a name like friendly fraud, it is easy to make the assumption that such a thing is a fairly innocuous activity ' an ignorant action on behalf of an innocent party. In many cases however this couldn't be further from the truth. For every $100 in chargebacks filed, the average merchant pays $270 in related costs, ultimately leading to increased prices ' consequently one of the most common incentives for friendly fraud.
So what can merchants do to protect themselves from friendly fraud? Providing 24/7 customer service is one tool for defense, and those companies who use a regular form of communication (such as a monthly newsletter) experience less episodes of friendly fraud. Getting signed delivery receipts may also help discourage friendly fraud, but there are no guarantees due to the variety of reasons available to consumers to initiate a chargeback.
Despite the fact that CNP transactions require different codes, processing accounts and require no additional validation on the banks' part to pursue chargebacks, these merchants still must abide by the same exact rules as a merchant who only processes card present transactions and obtains a signed sales receipt from the customer him- or herself.
Online merchants will inherently get more chargebacks. They are labeled as high risk and charged up to triple the related processing fees.
According to Visa and Mastercard, a merchant may undergo excessive fines or lose its ability to process credit or debit cards if they breech the threshold of 1% chargebacks in a given month. For example, if a merchant processes 1,000 transactions in a month and gets 10 chargebacks from dissatisfied customers that same month, they may face these consequences. For e-commerce business owners, no credit card processing means no business.
ABC News reported that 44% of Wal-Mart's customers were unsatisfied with Wal-Mart's customer service. See, “Customer Service: The New Proactive Marketing,” Huffington Post. Michael LeBoeuf, the author of “How to Win Customers and Keep Them for Life,” states that a typical business hears from only 4% of its unsatisfied customers. If every company performed like Wal-Mart, this would mean that 44 out of every 100 customers were not satisfied and only 4% of these would contact the merchant directly. This equates to less than two out of 44 unsatisfied customers providing the merchant an opportunity to resolve their upset. If you are a merchant who also transacts like Wal-Mart, you will likely receive the added benefit of being able to provide a signed sales receipt to prove the cardholder authorized their purchase ' and avoid a chargeback altogether.
However, if you made the transaction on a website, your chances for receiving a chargeback as a result of an unsatisfied cardholder (who contacted their bank instead of you) increase to just about 100%. So if two of the 44 unsatisfied customers call you, and only half of the remaining customers contact their bank, you can see how quickly the score changes ' and how easy it is to become trapped by the “alternative refund” of the friendly fraud chargeback.
Surviving Chargebacks
To survive as an e-commerce merchant, there really is only one recourse: Merchants must be smarter and better if they are going to survive. This means better customer service, real-time chargeback monitoring and paying attention to these types of details.
Chargebacks will come in, and there are defenses available to win back funds associated ' but unless merchants understand the offense, the odds are against them and the consumers.
Monica Eaton-Cardone is the Co-founder of Chargebacks911, which offers both response and resolution services for chargebacks and cardholder disputes. The company works with merchant clients to help them keep their dispute rates down and retain their ability to accept credit cards. For more information, visit www.chargebacks911.com.
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The abuse of the chargeback option has resulted in a “friendly fraud” epidemic harming not only merchants, but the very consumers the programs were designed to help.
With over $450 billon transacted each day, geographical boundaries are melding into a borderless digital exchange. Face-to-face relationships and old-fashioned “brand loyalty” are sacrificed in favor of an anonymous, multi-level playing field where no-name-products share the same shelf space and compete head-to-head with timeless favorites. When it comes to the online marketplace, advertising dollars set a new ante and present an equal opportunity for any seller to win a share of consumer spending.
Brick and mortar stores are becoming more like display chests than sales departments ' places to browse, take notes and experience new products and environments. The Web is quickly gaining ownership over the actual transaction scene; where the winning sales are distributed among those merchants who either bought their way to the top of search engines or undercut pricing due to their non-existent overheads. Smart consumers go to department stores to shop, but make their purchases online ' and why not? When you can purchase the same product at a lower price, compare every brand with the click of a mouse, potentially save the tax and even get free shipping and returns all without leaving the office or your couch, it is understandable why many consumers have migrated to the virtual marketplace.
But there is one last advantage often overlooked by statisticians and expert economists; one that is equally compelling, and uniquely concealed by almost every participant in the transaction chain: the added consumer insurance that comes inherently with a card-not-present (CNP) transaction ' most recently coined the Friendly Fraud Chargeback.
A History of Chargebacks
The term chargeback is not an unfamiliar one: thrown onto the bandwagon with identity theft and consumer fraud, it accompanies most defensive banking propaganda. Visa and Mastercard spearheaded the concept in an effort to help eradicate the unforeseen issues brought on by the growth of e-commerce. With successful consumer education initiatives, they forged a new world with greater awareness and armed consumers with a weapon that promised not only to aid them in defense of consumer fraud and identity theft crimes, but which actually gave consumers the power to reverse charges made to their account ' providing a powerful offensive tool for consumers to use against merchants in battles over the proper exchange of goods and services.
The problem is that although this seemed like a great idea with little backlash potential at the time, the abuse of the chargeback option has resulted in a friendly fraud epidemic harming not only merchants, but the very consumers the programs were designed to help.
Not all chargebacks are nefarious attempts on the part of the consumer to steal goods and/or services from the merchant. In fact, relying solely on Visa and Mastercard reason codes (designated to classify the origin of a chargeback case), consumer fraud and identity theft incidents have consistently made up about 78% of all chargebacks initiated today. These two types of fraud are foreshadowed by malicious criminal intent to defraud cardholders. It can be safely stated, however, that despite their existence, the global Web today is a much more secure place to transact than it was just five years ago.
Chargeback Means 'No Time?'
Independent merchant surveys have revealed that the leading reason a cardholder initiates a chargeback is because he “did not have time to contact the merchant.” Lexis Nexis has countered that despite the reported reason code statistics per Visa and Mastercard, a large number of these claims are miscoded and related to the rising friendly fraud epidemic; publishing their findings that at least 25% of all chargebacks initiated were due to this actuality in 2009. See, “Retailers Lost $139 Billion to Fraud in the Last Year, According to
With terms like “consumer fraud,” “identity theft,” “criminal intent” and “Internet scams,” it is interesting to note that a term resulting in an unfair consequence to the merchant (as opposed to the cardholder) has been coined such an unforgiving, not to mention confusing, term. A recent survey found that nine out of 10 e-commerce merchants didn't know the difference between friendly fraud and consumer fraud. (Chargebacks911 surveyed 50 random merchants willing to participate in its effort to help identify the key points of chargeback confusion. This was an opt-in survey which resulted in 45 of the merchants confusing the term friendly fraud and consumer fraud (believing they meant the same thing). Other survey points included asking merchants what they believed the Visa and Mastercard thresholds were, how these thresholds were calculated, what the difference was between a Processor and Gateway, and whether or not they believed it was illegal to contact a Visa or Mastercard customer who filed a chargeback (29 out of the 50, or 58%, believed they were not allowed to contact their customer to find out why a chargeback was filed).)
Friendly Fraud vs. Consumer Fraud
Friendly fraud happens when a consumer purchases a product, receives the goods or services related, and contacts his or her bank instead of the merchant to obtain a refund for a variety of reasons (most notable is an “unauthorized transaction” under the guidelines of card-not-present activity). Banks or credit card companies are not bound by any law to contact the merchant in the case where the transaction was made in a CNP environment. In other words, if the purchase was made through the Web, this qualifies for an immediate chargeback based on the subjective decision to believe the cardholder's claim.
Consumer fraud, by contrast, happens when a merchant engages in deceptive practices that result in the financial or property loss of the consumer. The consumer is usually under the impression that they are engaged in a legitimate business transaction until after the damage is done. Essentially, friendly fraud and consumer fraud are polar opposites, yet 90% of e-commerce merchants believe they are synonymous.
In the merchant processing industry, “guilty before proven innocent” is standard operating procedure. When a chargeback is initiated against the merchant, there is an irreversible fine and a negative statistic assigned to that merchant. The merchant also pays immediately for the cost of the transaction, while the cardholder reaps the reward of an often immediate, “temporary” refund (temporary only if the merchant spends extra money and time to diligently fight the case according to Visa and Mastercard guidelines and win back these previously debited funds). But even if the merchant fights the chargeback and wins back a portion of the funds, it often ends up a loser in more ways than one:
Most probable end result: The cardholder gets a refund, gets the product or service for nothing, and experiences no consequence while the merchant pays any and all fines and loses not only the purchase amount but the product as well. Statistically speaking, it is estimated that only 25% of all e-commerce merchants defend themselves against friendly fraud even though 100% become victims in today's society.
Defending Against Friendly Fraud
With a name like friendly fraud, it is easy to make the assumption that such a thing is a fairly innocuous activity ' an ignorant action on behalf of an innocent party. In many cases however this couldn't be further from the truth. For every $100 in chargebacks filed, the average merchant pays $270 in related costs, ultimately leading to increased prices ' consequently one of the most common incentives for friendly fraud.
So what can merchants do to protect themselves from friendly fraud? Providing 24/7 customer service is one tool for defense, and those companies who use a regular form of communication (such as a monthly newsletter) experience less episodes of friendly fraud. Getting signed delivery receipts may also help discourage friendly fraud, but there are no guarantees due to the variety of reasons available to consumers to initiate a chargeback.
Despite the fact that CNP transactions require different codes, processing accounts and require no additional validation on the banks' part to pursue chargebacks, these merchants still must abide by the same exact rules as a merchant who only processes card present transactions and obtains a signed sales receipt from the customer him- or herself.
Online merchants will inherently get more chargebacks. They are labeled as high risk and charged up to triple the related processing fees.
According to Visa and Mastercard, a merchant may undergo excessive fines or lose its ability to process credit or debit cards if they breech the threshold of 1% chargebacks in a given month. For example, if a merchant processes 1,000 transactions in a month and gets 10 chargebacks from dissatisfied customers that same month, they may face these consequences. For e-commerce business owners, no credit card processing means no business.
ABC News reported that 44% of
However, if you made the transaction on a website, your chances for receiving a chargeback as a result of an unsatisfied cardholder (who contacted their bank instead of you) increase to just about 100%. So if two of the 44 unsatisfied customers call you, and only half of the remaining customers contact their bank, you can see how quickly the score changes ' and how easy it is to become trapped by the “alternative refund” of the friendly fraud chargeback.
Surviving Chargebacks
To survive as an e-commerce merchant, there really is only one recourse: Merchants must be smarter and better if they are going to survive. This means better customer service, real-time chargeback monitoring and paying attention to these types of details.
Chargebacks will come in, and there are defenses available to win back funds associated ' but unless merchants understand the offense, the odds are against them and the consumers.
Monica Eaton-Cardone is the Co-founder of Chargebacks911, which offers both response and resolution services for chargebacks and cardholder disputes. The company works with merchant clients to help them keep their dispute rates down and retain their ability to accept credit cards. For more information, visit www.chargebacks911.com.
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