Economic Turmoil Signals Surge in Friendly Fraud for Retailers
By Monica Eaton, Founder and CEO of Chargebacks911
Economic instability has wreaked havoc on business owners trying to stay ahead of the next downturn that will negatively impact their bottom line. With all of the speculation surrounding a looming recession, retailers, especially those in eCommerce, must be on guard for a correlated increase in chargebacks fueled by financial uncertainty among consumers and take the steps necessary to keep one step ahead of them.
The Fraud Triangle
The Federal Reserve Bank of New York calculates a 66% probability of a recession by July 2024. Against the backdrop of the recent failures of two prominent banks, 47% of economists recently surveyed by Bankrate believe the chances of a recession are 70% or higher. Economic slumps create a phenomenon dubbed the “Fraud Triangle,” a significant uptick in financial fraud brought about by financial hardship, weak internal controls and oversight by businesses, and the rationalization by the perpetrator that chargeback fraud is a victimless crime.
Friendly Fraud Chargebacks
Chargeback misuse and abuse—also known as friendly fraud—have been rampant for decades and in recent years has been exacerbated by the perfect storm of inflationary pressures and the mass shift to eCommerce caused by the pandemic. Friendly fraud occurs when a consumer deliberately or unknowingly files a chargeback for an illegitimate reason, resulting in merchants losing products, forfeiting profits, and paying penalties and higher processing fees, costing them billions in lost revenue annually.
In the throes of inflation, cash-strapped consumers are more cautious with their spending and more likely to find a reason to dispute a transaction with a merchant to get their money back. To expedite the process, customers take advantage of the chargeback mechanism —a term used for forced refunds imposed by an issuing bank that includes additional penalties and fees that further eat away at a merchant’s profits.
A checkout.com survey found that 76% of merchants are anxious about their business’s financial health, and with chargeback rates increasing by 27% since the beginning of 2023, this comes as no surprise. Internal data from FastMode reveals that during a recession, average fraud-to-transaction ratios increase by 50%, fraud losses go up by 39%, and dispute-to-transaction ratios rise by 42%.
According to a 2021 Global Fraud Survey, 75% of merchants reported increases in fraud post-pandemic, with friendly fraud surpassing phishing and identity theft. An internal Visa study found that friendly fraud is responsible for up to 75% of all chargebacks. The average customer dispute amount is $25 to $75, with more than 50% of credit card holders admitting they filed a chargeback with their bank without contacting the retailer first to resolve their issue.
What’s worse is that studies show 80% of chargebacks could be resolved if the consumer were to contact the merchant rather than their bank, but these two entities are competing for convenience when it comes to resolving disputes.
Chargeback Misuse and Abuse
In a quest for “frictionless” customer experiences, banks have made filing a chargeback the go-to solution for consumers seeking instant resolutions to their retail disputes, tacitly encouraging the harmful trend of friendly fraud.
Chargeback fraud ranges from misuse to abuse. Many consumers unintentionally misuse the chargeback process by reporting valid transactions as fraud because they see a vendor name on their billing statement that they don’t recognize, usually because it is a parent company or clearinghouse. Chargeback abuse, on the other hand, is a form of cyber shoplifting where customers make a legitimate purchase. After receiving the item, they file a chargeback to get a refund without returning the product.
No matter the intent, a disconcerting 75% of consumers mistakenly believe that filing a chargeback with their bank is the same as requesting a refund from the retailer.
Chargeback Prevention Strategies
Merchants can recession-proof themselves by taking precautionary measures to prevent chargebacks from happening in the first place with these effective strategies:
- Ensure your contact information is prominently displayed on your website, and that your customer service department is empathetic and accessible. .
- When issues arise with a customer purchase, keep them informed of the progress in fulfilling their order.
- Review current policies and procedures that may be responsible for a rise in chargebacks.
- Clearly explain shipping, cancellation, and return policies and ensure they are easy for customers to find and understand.
- Be transparent and flexible when resolving customer disputes.
- Review operational procedures to reduce the possibility of merchant errors.
- Provide sufficient and accurate product or service descriptions that do not over-promise or mislead the customer.
- Carefully manage and monitor recurring payment subscription models like automatic renewals and billing, which are associated with a greater risk of chargebacks.
- Do not accept chargebacks as just the cost of doing business. Be on the alert for friendly fraud and work with a chargeback remediation expert.
To combat chargebacks amid recession fears, merchants must systematically address all chargeback disputes, including verifying cases of genuine fraud. By promoting awareness of the prevalence of friendly fraud through consistent communication with financial institutions, merchants can give banks a fuller picture of the adverse financial consequences chargebacks have on all parties involved.
Taking advantage of existing technology—such as AI and machine-learning tools—can streamline the chargeback process through structured data transmission and mitigate errors resulting from the manual handling of disputes. Actively addressing chargebacks and maintaining a collaborative exchange of data and insights can lead to a better, more unified approach between banks and merchants to combat friendly fraud.
About Monica Eaton
Monica Eaton is the Founder and CEO of Chargebacks911. Chargebacks911 is the global leader in chargeback prevention and remediation technology. As a provider or supplier to financial technology companies, Chargebacks911 helps safeguard more than 2.4 billion transactions per year on behalf of clients in 87 countries around the world.