How Consumers Are Shoplifting from the Comfort of Their Own Homes

With almost 87% of the population of North America being online, and the average U.S. cardholder spending $1,400 per year per card and owning 3.75 credit cards, it's easy to understand why online spending is growing at a rate of 20% per year as retailers continue to cultivate virtual marketplace demands. See, “Internet Usage Statistics,” Internet World Stats; “Credit Card Ownership Statistics,” Statistic Brain; “E-Commerce/Online Sales Statistics,” Statistic Brain.

The Nilson Report notes that worldwide payment card fraud caused a loss of $0.057 for every $100 in transactions in 2014. While five cents may not be a number to cause pause, when totaled, these fraudulent transactions resulted in over $14 billion in losses last year globally ' but, more importantly, this figure is more than likely less than 30% of all payment fraud, and less than 10% of the true cost of fraud. See, http://bit.ly/1LlTLzu.

The world is changing. Complex architecture, coupled with the rise of programmatically controlled digital media, engenders a perfect playground for fraud. This is a virtual habitat so appealing that even consumers are being tempted to commit fraud. And just like any vice, it only takes a few times before new habits are formed as the industry wanes in response to new addictions under the guise of victimization.

Fraud perpetrated by consumers themselves boasts a growth rate of up to 41% over the last two years alone, and accounts for $11.8 billion in losses according to Visa (LexisNexis) ' considering all card brands, two to three times this number is not a far stretch.

Three Sources of Fraud

When it comes to assigning blame, there are three distinct fraud sources that are often misidentified: 1) the retailer; 2) a card thief; or 3) the consumer.

1. Consumer fraud is a crime committed by a retailer (merchant) as an effort to defraud the consumer.
2. A criminal thief steals credit card data for criminal intent.
3. Cybershoplifting is a form of fraud created by a consumer (also known as friendly fraud, chargeback fraud, refund fraud, or return fraud).

Ironically, the type of fraud that is most widely misunderstood and most often misidentified is the single largest fraud threat to the U.S. and Europe: friendly fraud. Its increase in growth rate is attributed to the fact that an estimated 50% of consumers who commit friendly fraud and get away with it will do it again within 60 days.

With a name like “friendly fraud,” it's easy to understand how this growing issue could have been ignored. And it wasn't until I dug into the problem myself a few years ago that I realized how appropriately named “friendly fraud” actually was. Namely, this type of fraud really is a case of “friendly fire” aimed at rendering harm to all members in the transaction equation ' even the consumer, himself.

But besides the name being confusing and misunderstood, it is, more importantly, very difficult (if not impossible at times) to identify because, by its nature, this is a case of the consumer pretending to have another problem (such as a stolen card or suffering from a merchant scam/issue, etc.).

According to LexisNexis, every $100 in chargebacks (a type of forced refund that initiates a claim of wrongdoing or fraud committed against the consumer) costs the merchant $316. According to statistics surrounding “friendly fraud” with 50% of these customers committing the crime again in less than 60 days, this cost increases to $500.

Chargebacks are a consumer right implemented in 1974 in the United States through the Fair Credit Billing Act. Developed to protect consumers from deceptive merchants and credit card fraud, chargebacks allow customers to deal directly with their card provider in order to dispute unlawful charges.

Despite the three main reasons that chargebacks are filed ' merchant error, criminal fraud and friendly fraud ' the consumer's bank will only hear of two and have to exercise their own due diligence to identify attempts of the third; consequently, this is the highest percentage of online chargebacks initiated.

Chargebacks were designed to protect the consumer. When credit cards became more popular in around the 1970s, banking institutions were concerned that consumers would be easily taken advantage of by deceptive merchants. As card-not-present merchants evolved, more consumer protections were initiated, and fewer fraudulent merchants successfully scammed their customers. However, during this same time, the chargeback evolved as well, transforming from a tool to protect shoppers into a tool that enables them to “cybershoplift.”

Reasons for Cybershoplifting

The act of cybershoplifting using chargebacks is known as chargeback or “friendly fraud.” Friendly fraud may be committed for one of three main reasons: 1) accidentally; 2) out of convenience; or 3) intentionally.

The first reason is accidental. It may sound unlikely, but many friendly fraud chargebacks are issued without the cardholders even realizing they are committing a crime. If a consumer does not recognize a charge, she may file a chargeback right away. However, there are valid reasons a credit card charge may seem confusing to a cardholder. Things such as unclear descriptors, applied exchange rates, an extended lapse of time, and even a simple lack of memory of the purchase can all throw a cardholder off. These are perfect examples of times consumers should contact the merchant to inquire about the charge. By requesting information from the issuing bank, or even conducting a simple online search of the descriptor, the cardholder can track down the merchant involved in the questionable transaction. Sadly, by bypassing the merchant and filing a chargeback, the cardholder may not even realize that he or she is doing anything wrong, when in fact, he or she is stealing directly from the merchant and (in most cases) causing irreversible harm.

The second reason that many consumers who commit friendly fraud deals with convenience. Shoppers do not want to go through the assumed hassle of sending back a product they no longer want, contacting the merchant for a refund, or dealing with customer service to resolve an issue. By simply requesting a refund from their banks, cardholders instantly receive their money ' or so they think. These cases are easily fought by merchants. Cardholders who file chargebacks for this reason are not only breaking the law, but they could be blacklisted from retail sites that they often use, and they could also lose the case and any chance of returning or exchanging the undesired product.

And the third reason is where cybershoplifting truly comes in: consumers who file invalid chargebacks with the intention of getting something for free. Fraudsters make purchases through a card-not-present channel, such as online, mail or phone order, and receive the desired products as described. Then, because they either regret spending the money or never intended to spend it at all, they file chargebacks against the merchant in order to receive a full refund. These cardholders claim a variety of reasons for requesting a chargeback, from product not delivered to never placing the order at all. Not only does this form of friendly fraud rob merchants of money and products, but it also destroys their chargeback ratios and creates false chargeback reason code data.

It is inherently evident why merchants should care about friendly fraud chargebacks: they can damage, threaten and even destroy an online business. Once online retailers take notice of the fraudulent chargebacks that are plaguing their businesses, they must take the necessary steps to prevent them.

Effects of EMV In Card-Not-Present Fraud

The United States has just incurred a shift in liability when it comes to EMV payment card transactions. With a deadline of Oct. 1, millions of brick-and-mortar businesses have now implemented EMV payment terminals throughout their locations so as to avoid being held responsible for in-store fraud. With EMV card technology, card-present fraud is slated to decline drastically due to the unique codes generated for each and every purchase made. But because of this giant step forward in the war against in-store fraud, criminals are expected to migrate online, and card-not-present merchants are warned to gear up for an increase in fraudulent activity.

In 2012, the Federal Reserve System reported that card-not-present fraud rates exceeded card-present fraud rates by nearly 3 to 1. See , http://bit.ly/1KlHXsS. This trend, coupled with the United States' implementation of EMV chip and pin cards by the first of this month, will result in CNP fraud not slowing down any time soon.

Unfortunately for merchants, an increase in online criminal fraud has a cause and effect relationship with friendly fraud as well. This equation is due to the fact that friendly fraud has been known to follow “bandwagon behavior,” where illegitimate dispute activities surge following news of data breaches or fraudulent payment vulnerabilities.

Best Advice for Merchants

Merchants' first reactions to incurring losses from friendly fraud disputes will be to tighten security. This will result in more steps in the checkout process and less ease of purchase for valid consumers. The next move made by merchants will be to raise the prices of products or shipping to compensate for losses. If the chargebacks don't cease, friendly fraudsters may consequently be blacklisted, and as is true with any type of crime committed, cybershoplifting is punishable by law. Merchants have prosecution rights for this offense.

Cybershoplifting affects all parties in the online shopping world, but none as much as the merchants. The manipulation of chargebacks has resulted in billions of dollars in losses around the world. But the most unfortunate fact is that the fight is just beginning.

Merchants must make an effort to prevent all the chargebacks they can, and to fight the ones they can't prevent. It may sound impossible, but it is necessary for the survival of their businesses. This can be achieved by combining human interaction with automated programs:

• Employ Intelligent Source Detection. Run a detailed, 108-point inspection to accurately identify chargeback triggers and help prevent them.
• Customize Every Dispute. Since “one-size-fits-all” replies are often unsuccessful, trained chargeback specialists use a multi-step process to customize each response before submitting it to the bank.
• Implement Dynamic Loss Prevention. Rather than relying on outdated static techniques, chargeback mitigation should use adaptive solutions that account for a constantly evolving e-commerce landscape.

Every time a customer loses a friendly fraud chargeback dispute, they are less likely to try it again. However, every time they win, the chances that they will commit friendly fraud again increases by 50%. By fighting and winning these disputes, merchants are protecting themselves from an onslaught of fraudulent activity.

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.

Online retail has completely transformed the way the world goes shopping. It is projected that consumers worldwide will spend nearly $1,700 billion in online sales this year. See, “B2C e-Commerce Sales Worldwide from 2012 to 2018,” Statistica. Consumers are leaving the physical swiping of cards and exchange of cash behind for the ease and convenience of a card-not-present transaction. But more important than the effect on brick-and-mortar, this paradigm shift is reshaping the way consumers think.

And who could blame them? Without leaving their chairs, U.S. shoppers can have their food, medications, household cleaning products and new shoes delivered to their front doors. Developments such as instant digital deliveries and the constant streaming of books, movies, television and music have morphed the software and entertainment industries. The smartphone and tablet's ability to mobilize these processes take the online shopping concept to an even more abstract level.

Technological evolution is transforming human behavior ' for better or for worse. The goal of contactless payments has been surpassed with the demands for frictionless interaction, and the result may not be as good as it sounds.

With almost 87% of the population of North America being online, and the average U.S. cardholder spending $1,400 per year per card and owning 3.75 credit cards, it's easy to understand why online spending is growing at a rate of 20% per year as retailers continue to cultivate virtual marketplace demands. See, “Internet Usage Statistics,” Internet World Stats; “Credit Card Ownership Statistics,” Statistic Brain; “E-Commerce/Online Sales Statistics,” Statistic Brain.

The Nilson Report notes that worldwide payment card fraud caused a loss of $0.057 for every $100 in transactions in 2014. While five cents may not be a number to cause pause, when totaled, these fraudulent transactions resulted in over $14 billion in losses last year globally ' but, more importantly, this figure is more than likely less than 30% of all payment fraud, and less than 10% of the true cost of fraud. See, http://bit.ly/1LlTLzu.

The world is changing. Complex architecture, coupled with the rise of programmatically controlled digital media, engenders a perfect playground for fraud. This is a virtual habitat so appealing that even consumers are being tempted to commit fraud. And just like any vice, it only takes a few times before new habits are formed as the industry wanes in response to new addictions under the guise of victimization.

Fraud perpetrated by consumers themselves boasts a growth rate of up to 41% over the last two years alone, and accounts for $11.8 billion in losses according to Visa (LexisNexis) ' considering all card brands, two to three times this number is not a far stretch.

Three Sources of Fraud

When it comes to assigning blame, there are three distinct fraud sources that are often misidentified: 1) the retailer; 2) a card thief; or 3) the consumer.

1. Consumer fraud is a crime committed by a retailer (merchant) as an effort to defraud the consumer.
2. A criminal thief steals credit card data for criminal intent.
3. Cybershoplifting is a form of fraud created by a consumer (also known as friendly fraud, chargeback fraud, refund fraud, or return fraud).

Ironically, the type of fraud that is most widely misunderstood and most often misidentified is the single largest fraud threat to the U.S. and Europe: friendly fraud. Its increase in growth rate is attributed to the fact that an estimated 50% of consumers who commit friendly fraud and get away with it will do it again within 60 days.

With a name like “friendly fraud,” it's easy to understand how this growing issue could have been ignored. And it wasn't until I dug into the problem myself a few years ago that I realized how appropriately named “friendly fraud” actually was. Namely, this type of fraud really is a case of “friendly fire” aimed at rendering harm to all members in the transaction equation ' even the consumer, himself.

But besides the name being confusing and misunderstood, it is, more importantly, very difficult (if not impossible at times) to identify because, by its nature, this is a case of the consumer pretending to have another problem (such as a stolen card or suffering from a merchant scam/issue, etc.).

According to LexisNexis, every $100 in chargebacks (a type of forced refund that initiates a claim of wrongdoing or fraud committed against the consumer) costs the merchant $316. According to statistics surrounding “friendly fraud” with 50% of these customers committing the crime again in less than 60 days, this cost increases to $500.

Chargebacks are a consumer right implemented in 1974 in the United States through the Fair Credit Billing Act. Developed to protect consumers from deceptive merchants and credit card fraud, chargebacks allow customers to deal directly with their card provider in order to dispute unlawful charges.

Despite the three main reasons that chargebacks are filed ' merchant error, criminal fraud and friendly fraud ' the consumer's bank will only hear of two and have to exercise their own due diligence to identify attempts of the third; consequently, this is the highest percentage of online chargebacks initiated.

Chargebacks were designed to protect the consumer. When credit cards became more popular in around the 1970s, banking institutions were concerned that consumers would be easily taken advantage of by deceptive merchants. As card-not-present merchants evolved, more consumer protections were initiated, and fewer fraudulent merchants successfully scammed their customers. However, during this same time, the chargeback evolved as well, transforming from a tool to protect shoppers into a tool that enables them to “cybershoplift.”

Reasons for Cybershoplifting

The act of cybershoplifting using chargebacks is known as chargeback or “friendly fraud.” Friendly fraud may be committed for one of three main reasons: 1) accidentally; 2) out of convenience; or 3) intentionally.

The first reason is accidental. It may sound unlikely, but many friendly fraud chargebacks are issued without the cardholders even realizing they are committing a crime. If a consumer does not recognize a charge, she may file a chargeback right away. However, there are valid reasons a credit card charge may seem confusing to a cardholder. Things such as unclear descriptors, applied exchange rates, an extended lapse of time, and even a simple lack of memory of the purchase can all throw a cardholder off. These are perfect examples of times consumers should contact the merchant to inquire about the charge. By requesting information from the issuing bank, or even conducting a simple online search of the descriptor, the cardholder can track down the merchant involved in the questionable transaction. Sadly, by bypassing the merchant and filing a chargeback, the cardholder may not even realize that he or she is doing anything wrong, when in fact, he or she is stealing directly from the merchant and (in most cases) causing irreversible harm.

The second reason that many consumers who commit friendly fraud deals with convenience. Shoppers do not want to go through the assumed hassle of sending back a product they no longer want, contacting the merchant for a refund, or dealing with customer service to resolve an issue. By simply requesting a refund from their banks, cardholders instantly receive their money ' or so they think. These cases are easily fought by merchants. Cardholders who file chargebacks for this reason are not only breaking the law, but they could be blacklisted from retail sites that they often use, and they could also lose the case and any chance of returning or exchanging the undesired product.

And the third reason is where cybershoplifting truly comes in: consumers who file invalid chargebacks with the intention of getting something for free. Fraudsters make purchases through a card-not-present channel, such as online, mail or phone order, and receive the desired products as described. Then, because they either regret spending the money or never intended to spend it at all, they file chargebacks against the merchant in order to receive a full refund. These cardholders claim a variety of reasons for requesting a chargeback, from product not delivered to never placing the order at all. Not only does this form of friendly fraud rob merchants of money and products, but it also destroys their chargeback ratios and creates false chargeback reason code data.

It is inherently evident why merchants should care about friendly fraud chargebacks: they can damage, threaten and even destroy an online business. Once online retailers take notice of the fraudulent chargebacks that are plaguing their businesses, they must take the necessary steps to prevent them.

Effects of EMV In Card-Not-Present Fraud

The United States has just incurred a shift in liability when it comes to EMV payment card transactions. With a deadline of Oct. 1, millions of brick-and-mortar businesses have now implemented EMV payment terminals throughout their locations so as to avoid being held responsible for in-store fraud. With EMV card technology, card-present fraud is slated to decline drastically due to the unique codes generated for each and every purchase made. But because of this giant step forward in the war against in-store fraud, criminals are expected to migrate online, and card-not-present merchants are warned to gear up for an increase in fraudulent activity.

In 2012, the Federal Reserve System reported that card-not-present fraud rates exceeded card-present fraud rates by nearly 3 to 1. See , http://bit.ly/1KlHXsS. This trend, coupled with the United States' implementation of EMV chip and pin cards by the first of this month, will result in CNP fraud not slowing down any time soon.

Unfortunately for merchants, an increase in online criminal fraud has a cause and effect relationship with friendly fraud as well. This equation is due to the fact that friendly fraud has been known to follow “bandwagon behavior,” where illegitimate dispute activities surge following news of data breaches or fraudulent payment vulnerabilities.

Best Advice for Merchants

Merchants' first reactions to incurring losses from friendly fraud disputes will be to tighten security. This will result in more steps in the checkout process and less ease of purchase for valid consumers. The next move made by merchants will be to raise the prices of products or shipping to compensate for losses. If the chargebacks don't cease, friendly fraudsters may consequently be blacklisted, and as is true with any type of crime committed, cybershoplifting is punishable by law. Merchants have prosecution rights for this offense.

Cybershoplifting affects all parties in the online shopping world, but none as much as the merchants. The manipulation of chargebacks has resulted in billions of dollars in losses around the world. But the most unfortunate fact is that the fight is just beginning.

Merchants must make an effort to prevent all the chargebacks they can, and to fight the ones they can't prevent. It may sound impossible, but it is necessary for the survival of their businesses. This can be achieved by combining human interaction with automated programs:

• Employ Intelligent Source Detection. Run a detailed, 108-point inspection to accurately identify chargeback triggers and help prevent them.
• Customize Every Dispute. Since “one-size-fits-all” replies are often unsuccessful, trained chargeback specialists use a multi-step process to customize each response before submitting it to the bank.
• Implement Dynamic Loss Prevention. Rather than relying on outdated static techniques, chargeback mitigation should use adaptive solutions that account for a constantly evolving e-commerce landscape.

Every time a customer loses a friendly fraud chargeback dispute, they are less likely to try it again. However, every time they win, the chances that they will commit friendly fraud again increases by 50%. By fighting and winning these disputes, merchants are protecting themselves from an onslaught of fraudulent activity.

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.