:: By Chitra Singh, Radial ::
Managing ecommerce fraud is extremely challenging, leaving many merchants stuck between elevated exposures and disrupting valuable customer experiences.
Going at it alone means merchants must invest heavily in fraud detection tools, collaborate with third-party agencies, and dedicate numerous resources to mitigating fraud. While this is a daunting task, there is an even more troubling trend at play.
Most ecommerce fraud is perpetrated by criminals using compromised information to make unauthorized purchases, However, there are much less suspect customers to watch out for - customers with impeccable digital risk profiles that pass fraud screening tests but make authorized purchases and later claim them as unauthorized.
This type of common first-party fraud is known as "friendly fraud." And just as fraud trends evolve over time, friendly fraudsters alter their tactics to stay a step ahead of unsuspecting merchants. Friendly fraudsters order a good or service, and provide legitimate billing and shipping information. After receiving their order, they contact the merchant or their card issuing bank and dispute the charge. Friendly fraudsters use various false claims to substantiate their dispute, such as: the order never arrived; the service was not rendered, or the transaction was unauthorized, among others. They may also circumvent the bank and make a false claim directly with a merchant's customer service team, who might be quick to accommodate the request in order to keep the customer happy.
While these scenarios might not align with traditional ecommerce fraud, intentionally creating an invalid claim is indeed fraudulent, and merchants must be adept at managing friendly fraud or it can be costly.
Digging deeper into the problem
Friendly fraud is complex and it is difficult for a merchant to validate if a customer's claim is warranted. A customer's order might have been stolen from their doorstep, or delivered to the wrong address. It may be an honest mistake, where the customer doesn't recognize the charge because the order was placed by a member of their household without their knowledge, or the billing description is from a third-party processor not the actual merchant.
The complexity is exacerbated further by the customer bypassing the merchant and going directly to the payment provider to dispute the charge. Research from Verifi shows that 86 percent of the time cardholders will not contact the merchant until after a dispute was filed, or even worse, not at all. Now the merchant is faced with a labor intensive manual process and the potential for additional losses in the form of chargeback fees levied by the payment provider.
Any chargeback activity on a transaction means that the merchant will incur costs, ranging from the chargeback processing fees and acquirer fees to operational and labor costs. With payment processor rules usually favoring customers over the merchant, there is no guarantee that the merchant will win - even if the chargeback representment is followed to the letter.
Since the burden of proof and cost lies with the merchant, it is their responsibility to collect all supporting facts in documentary form, which can include address verification, CVV verification, IP address information, or product delivery and confirmation records. Subsequently, the merchant needs to decide the right course of action -challenge or accept the liability - based on compelling evidence, the dollar value of the disputed charge, and the potential chargeback fees.
What to do when good customers turn bad
1. Clearly communicate: Merchants should be upfront and clear with customers about their policies and practices, especially regarding billing, shipping and refunds. Merchants should also immediately email order invoices and product details and ensure that the billing descriptors are clear. This will make it easier for the customer to recognize the charge and lessen the possibility of the charge being disputed.
2. Know your customer: Merchants should use chargeback data and customer service data to analyze a customer's profile and identify abusive claim patterns. Customers' claim history and chargeback data (for both fraud and non-fraud issues) will help pinpoint friendly fraud and improve prevention methods. Merchants should look for customers who are repeatedly filing disputes or contacting customer service teams directly to get a refund. In order to combat friendly fraud, it is very important for merchants to know their customers and more importantly, know the repeat offenders. By maintaining a list of customer names, shipping addresses and other data points from customers claiming non-receipt, damaged merchandise, etc., merchants can cross reference this information when a new order is placed. If the same customer, shipping address or other data point is repeatedly associated with claims, then it is likely this person is committing friendly fraud and the appropriate action can be taken.
3. Enforce stricter order processing: Once repeat offenders are identified, make a signature mandatory for proof of delivery for all future orders from these customers. This measure will help protect the merchant from chargeback issues and it will increase the shipping cost for the customer. Both the signature and higher shipping fee should be red flags for the customer that he is under increased scrutiny and deter him from making future attempts of friendly fraud. Merchants can also establish a variety of parameters around friendly fraud customers such as limiting the total dollar value of an order. Ultimately, the goal is to frustrate friendly fraudsters by making order processing stricter to prevent fraud and protect the merchant if a chargeback issue arises.
4. Put customers on notice: For chronic abusers, extreme measures might be warranted. Notify customers in writing that no further refunds will be issued due to repeated, unwarranted claims. Also, the merchant should have the customer sign an affidavit prior to processing any future orders. Doing so will help absolve the merchant of chargeback liability on any future online purchases. However, merchants should weigh the possibility of negative repercussions on social media and customer reviews against the fraud risk.
5. Leverage chargeback representment: A merchant's chargeback team should aggressively fight and refute chargebacks that indicate abusive customer claims patterns. Engaging in representment informs the bank that the merchant is not liable, and most importantly sends a message to the card issuer that more due diligence is required the next time the customer requests a bank issued refund by initiating a chargeback.
Chitra Singh is a supervisor of chargebacks at Radial, a leader in omnichannel commerce technology and operations, enabling brands and retailers to profitably exceed retail customer expectations