Merchants Must Be Wary of Friendly Fraud Too

Jan 21, 2022

Analysts are already predicting that early 2022 will be the season for chargebacks. Sift’s newest report, “Q4 2021 DIgital Trust & Safety Index: Navigating The New Normal Of Digital Fraud And Disputes”, found that the “average daily chargeback cases” (those actually filed), went up by 19% between Q1 2020 and Q1 2021. 

Typically, where the consumers shop, fraudsters follow. Profits from this upcoming shopping season are expected to exceed last year’s earnings and hit $207 billion. This was an increase of 10% from 2020. Over this exact time period, digital attacks and Account Takeover Fraud (ATO) also rose significantly.

When The Legitimate Cardholder And Fraudster Are One In The Same

Consumers tend to flock to retailers who have reasonable return policies if they received damaged goods, change their minds, or the purchase itself was unauthorized. Sift reported that 65% of consumers have disputed a purchase during their lifetime. 

Of those who have disputed their purchases, over one-third (42%) filed disputes due to “true fraud” (e.g., an unauthorized purchase using the customer’s card information). 

However, there were 17% of customers admitted to filing “friendly fraud”. This is where the customer actually filed a true fraud dispute, yet the transaction was not fraudulent. 

What may undermine a businesses’ bottom line is that friendly fraud makes up almost 75% of all chargebacks. And these are legitimate transactions. Retailers also top customers’ lists for challenging purchases. 

Chargebacks And Their Impact On Merchants

Although having an online business meets the need for a more convenient and flexible shopping experience for merchants and customers, it also exposes them to fraudulent attacks. When disputes do arise, it is the merchant who is pronounced: “guilty until proven innocent.”

As soon as a customer files a dispute, the bank processes this dispute, which leads to the merchant losing the transaction amount. Merchants are also responsible for covering as much as $40 per chargeback. This, of course, depends on the payment processor. If you are a high-risk merchant, do expect to pay more. 

In addition, businesses are also responsible for paying credit card processing fees, which are between 1% and 4%. This covers the data transmission cost, the chargeback itself, and to cover the “chargeback exposure for the processor.”

The merchant stands to lose the cost of the product or the service, costs of time and labor, and any possible shipping fees. 

True fraud will always be a concern. The best strategy to combat it is to implement a more proactive fraud prevention strategy that will stop illegitimate purchases from happening in the first place.

To take on friendly fraud, especially when it comes to legitimate purchases, teams must be equipped to optimize which disputes are actually worth confronting. Trust and safety analysts must also be given strategic guidance as well as all the necessary tools to streamline these processes. 

Sometimes, it has been found that some friendly fraud has been completely unintentional. One study even highlighted that almost 25% of disputes can be evaded by offering customers more detailed information so they can recognize their purchases. 

In addition, unintentional friendly fraud disputes can be mitigated by offering more information to customers by way of having clear return and cancellation policies. 

The Road Ahead

As seen in the last few years, the “Fraud Economy” continues to grow more pervasive as well as more advanced. Fraudsters will forever seek a weak link in which to permeate and invade the customer’s payment journey. 

Fraud teams should be less reactive as the problem is interconnected. Being such requires an interconnected solution so that the business is given the highest protection. 

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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