On the Rise, Friendly Fraud Is Getting Online Merchants’ Attention

More online shoppers are repudiating transactions even after they've received their merchandise, much to the chagrin of online merchants, which are focusing on the problem as they seldom have in the past. That's according to Robert W. Botelle, executive vice president for merchant services and chief customer officer at Litle & Co., a Lowell, Mass.-based processor of card-not-present transactions. It's called friendly fraud, and Botelle tells Digital Transactions News more consumers have resorted to it as a result of the pressures of the recession. “Friendly fraud is going up,” he says. “And other types of chargebacks are also going up. Refund and return fraud is also up because of the economy.” Nor is it likely friendly-fraud chargebacks will decline when economic conditions improve, Botelle argues. “I think it'll stay where it is,” he says. The reason: Consumers are savvier about how credit card chargebacks work, and if they've been getting away with such repudiation now they'll continue to do so when the economy turns. Also, no widely adopted means of authenticating online buyers?to prove they really did buy the product?has emerged, Botelle adds. But the downturn has also driven merchants to concentrate on the problem. “The reason it's such a big issue now is that merchants are working with smaller staffs and lower budgets,” Botelle says. That means online sellers are looking for new ways to control costs, including the costs of friendly fraud. Online merchants filled a room on Thursday during a presentation Botelle gave on the subject at the annual meeting of the Merchant Risk Council, an e-commerce trade group, in Las Vegas. Numbers on just how much friendly fraud is being perpetrated are hard to pin down. More than one in five merchants are reporting an increase, according to a study released last year by Javelin Strategy & Research and LexisNexis. The same study says friendly fraud now accounts for one-third of total fraud losses for merchants that take online payments. “Friendly fraud raises so much anxiety in people,” Botelle says. Nor does all friendly fraud occur on credit cards. Botelle says a problem for merchants accepting installment payments are transactions in which consumers receive merchandise but charge the installments to a prepaid card they know will run out of funds before the last installment is due. “It's a very big problem,” he notes. “If a merchant is doing continuity [payments] and not screening for prepaid cards, [he's] setting [himself] up for a big loss.” Still, he says, there are steps merchants can take to contain the problem. He recommends that merchants study fraud-coded chargebacks for tell-tale clues that the buyer may have indeed made the purchase. “You can pick things up that just don't sound right,” Botelle says. One example: A ticket size larger than is typical for that customer or for that merchant. Also, documentation from the customer indicating he or she did order the merchandise but then returned it can betray an unwarranted repudiation when a check of a customer-service screen shows no contact from the customer during the time in question. Retrieval of the bank identification number (BIN) involved in the disputed transaction may also hold clues to whether a merchant could win a chargeback dispute, Botelle says. Not all banks handle such claims the same way, he says, and not all will react to a merchant challenge the same way. “Each BIN acts differently based on their system capability,” he says. If convinced a particular case is one of friendly fraud, the merchant can confront the customer on the phone, Botelle argues. This tactic usually works, though it's value is limited by the fact that it's expensive and so only makes sense if warranted by the value of the merchandise in question. “Do a callout to the customer,” Botelle advises. “Most of them will cave.”