Refunding Fraud: Friendly Fraud On The Rise

Jul 23, 2020

The ongoing fight against fraud seems to be intensifying. Specifically, Friendly Fraud is on the rise and becoming more widespread. The term “Friendly Fraud” is a misnomer as there is absolutely no “friendly” intent on the part of the cybercriminals who engage in this illegal act. 

Friendly fraud, also known as chargeback fraud, happens when a customer purchases a product online by using their own credit card. Shortly after, they request a chargeback from their bank after they have received their product. 

Friendly Fraud: Notoriously Difficult To Detect

It is precisely because these “friendly fraudsters” don’t use stolen identities that it is incredibly difficult to detect and fight it. Because they are using their own, legitimate identities, they are able to bypass standard customer verification methods such as passwords, biometrics, and two-factor authentication. 

The most common type of fraud happens when customers request chargebacks directly from their banks. Their reasons are usually either the purchase was fraudulent or that the item arrived defective. Typically, banking institutions grant customers a refund and then recover the funds directly from the merchant. 

On occasion, these types of actions are not necessarily malignant. Some customers may legitimately be seeking a refund due to an error in purchase so they seek out a chargeback from their bank without having to deal directly with the merchant. The best practice is to always seek a refund from the merchant as a first course of action. 

Regardless of the intention, chargebacks have a catastrophic impact on merchants. Not only do they face loss of revenue as well as stolen product, but credit card companies charge tough penalties. For example, Visa typically charges merchants up to $75,000 per month. However, this greatly depends on the number of chargebacks experienced and the length of time it has been monitored. In more severe cases, credit card companies could ban merchants from accepting their credit cards completely, severing off vital revenue streams. 

Why Do Consumers Continuously Get Away With Chargeback Fraud?

Statistics and studies abound about the growing prevalence of fraud. So why is nothing being done to stop it?  Here are some reasons:

  • Reason codes don’t truly describe the transaction dispute:  Banks typically designate a code to identify the reason for the customer charging the dispute. However, many merchants won’t dare challenge these reasons even though they are illegitimate claims. This will only allow this illegal practice to continue.
  • Chargebacks are easier than refunds: There was a study that found that 81% of credit card holders have filed a chargeback simply out of convenience. They were convinced that, instead of contacting the merchant directly, they found it simpler to ask their bank for their “refund.”
  • Most chargeback regulations are outdated: Since most of the existing chargeback regulations were penned before the existence of the Internet, they were not created to fit in today’s fast-moving, tech-centered marketplace. 
  • Banks are not equipped or simply not willing to exercise due diligence: Banks are not keen on ruffling their customer’s feathers. They want to ensure that they are happy. Therefore, when a customer files a chargeback, the bank automatically assumes that they are right. As the number of cases have skyrocketed, banks have been ill-equipped and understaffed to fully investigate these claims. Meanwhile, the merchant is shouldering the chargeback costs. 

Make Your Business “Chargeback Proof”

It is imperative that businesses take a closer look at their current practices and how this can be leaving them vulnerable to chargebacks. To fight friendly fraud, businesses should consider using Address Verification Services (AVS), sign up for 3D Secure, improve their current customer service, and identify as well as take on any threats early on, just to name a few. These are just a few strategies to implement today to stop any revenue losses now and in the future.

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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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