In both cases, merchants are left holding the financial bag for the entire transaction. So if a merchant’s fraud protection solution can’t keep up with rising chargebacks, they must find other ways to improve the security of their transactions.
Why Friendly Fraud Is a Growing Problem
Chargebacks, intended to be a form of consumer protection for credit card holders, have been around for more than 40 years. Yet what many customers still don’t understand is that filing chargebacks isn’t the same as asking merchants for refunds. And these chargeback disputes — even if they’re only for small amounts — are having a growing effect on e-commerce merchants. Not only do they risk losing their merchant accounts due to too-high fraud ratios, but they also risk losing significant revenue due to the lost product, lost shipping expenses, expensive chargeback penalties, and fines due to TC40 claims.
Most merchants find it’s difficult to defend their position in a chargeback dispute — even with proof of purchase and delivery. To add insult to injury, because instances of friendly fraud come from legitimate customers, this type of fraud is almost impossible to prevent.
But e-commerce retailers try, with some using basic fraud filters in a cost-conscious effort to identify and prevent fraudulent transactions. But these strategies do little to defend against friendly fraudsters. Because the customer isn’t claiming to be anyone other than himself and isn’t intentionally trying to defraud the merchant, these orders rarely raise red flags.
Larger merchants may take it up a notch, sharing fraud prevention databases with other companies, accessing their customer profiles to see if customers have a history of filing chargebacks on legitimate purchases. Although this approach may help merchants identify serial friendly fraudsters, it may not be useful in stopping customers from making one-time-only honest chargeback mistakes.
How Merchants Can Minimize Their Risk of Friendly Fraud
So if the nature of friendly fraud means merchants can’t rely on their fraud prevention solution to protect their business, what can a merchant do? Here are two tips for reducing a business’s risk of friendly fraud chargebacks.
Clarify Subscription Policies
An e-commerce merchant might notice the bulk of their chargebacks are being coded as nonfraud — recurring subscriptions that a customer forgets to cancel are a prime example. To avoid this, e-commerce merchants should regularly review their posted policies on recurring billing and ensure they’re easy for the customer to understand. Merchants should also make it easy for the customer to cancel a subscription-based service.
As a best practice, merchants should always contact customers in advance of each scheduled purchase, detailing the billing date, the amount and the reason.
Write Better Descriptors
Customers often initiate chargebacks because they don’t recognize a merchant charge on their credit card statements. To avoid this, the descriptor merchants use for statements should be the same name that appears on the website customers are purchasing from (which may be different than the company’s legal name). Merchants might also consider using dynamic descriptors, which modify the descriptor field based on transaction-specific information.
No e-commerce merchant wants to be the victim of fraud, but it’s nearly impossible to eliminate. If you feel your fraud protection solution isn’t working with you to defend your business against friendly fraud and expensive chargebacks, it may be time to consider an alternative.
Download our free “Fraud Protection Buyer’s Guide” today to help you evaluate your options, protect your business over the long term and guarantee transactions 100% against fraudulent chargebacks.