Merchants often think that chargeback fraud and friendly fraud is the same thing, but they are quite different. Not knowing the difference between both of these is crucial for your business. Chargebacks are often the number one reason why a company’s credit card processing results in termination. And, excessive chargebacks are the cause for why merchants are put on MATCH list.
In this two-part blog series, we will provide more details about what these fraud schemes really are. Also, you will learn how to win more chargeback disputes in both cases.
Difference between friendly fraud and targeted chargeback fraud
The difference between friendly fraud and chargeback fraud naturally depends on the specific intent of the consumer. The former occurs by accident, while the latter is achieved maliciously.
For example, let‘s say you launched a seduction, PUA or matchmaking info product in November 2018. Imagine potential customers were offered a 12-month digital access to an online course via video content in the members’ area of your site. You charge at a cost of $24.99 on the 10th day of every month.
Now, imagine Customer A never logged in to use your offer and went away on Christmas vacation for two weeks. Two months later and still not having logged in, they check their credit card statement and don’t recognize your company’s descriptor and charge. Consequently, they call their bank and ask for a chargeback to be issued. This is an example of friendly fraud. In this scenario, Customer A genuinely forgot that they either signed up for your offer, which involved recurring billing, or may have not intended to purchase a subscription.
Now, imagine Customer B signed up for your product at the same time and even logged in to consume your content. If Customer B calls their bank to request a chargeback three months later knowing they did indeed use your product, this is considered targeted chargeback fraud. He/she will likely avoid speaking with your customer support team. They will also consider themselves a victim to get a product or service without paying for it.
The role of affiliates
Now that you know the difference between friendly fraud and chargeback fraud, it’s important to recognize the role affiliates play in your business. Affiliates are your partners; therefore, it’s important to know how they are representing what you are selling.
Fraud may occur due to affiliates sending you traffic from campaigns misrepresenting your products or services. The intent by these affiliates is to just to receive their commission one way or another. Consequently, customers are uninformed about what they are purchasing and end up initiating a chargeback. It’s critical to recognize how affiliates are sending you traffic to ensure it correctly represents your business.
Merchant categories prone to chargeback fraud
There are many merchant types that are more prone to chargeback fraud than others. However, merchants with a recurring order model tend to suffer more than others in the high-risk space. One example is gaming merchants. They often see chargeback fraud from users who consume games and then call their bank claiming they did not use the service. This has become a thorn in the side for gaming companies. Businesses that offer soft games (be it via mobile or desktop), and more intense online casino gambling tend to endure a lot of this type of fraud.
Another category of vendors that incur a lot of chargeback fraud is subscription merchants. Merchants with a recurring billing model experience a high rate of chargebacks from users, particularly after the holiday season. Some might classify this as buyer‘s remorse. However, it is chargeback fraud when the customer’s intent is to happily consume your product or service and then get refunded via their bank.
Some merchants actually do file criminal charges, as chargeback fraud is punishable by law with the right evidence. It could be considered a felony and if the customer is convicted, will result in up to 15 years of prison time. This is a rare exception of course, as merchants would rarely pursue a customer legally unless there is a sizable sum of money being charged back.
Visa and MasterCard want to avoid liability
Whether your company is completely innocent in the matter of chargeback fraud makes no difference to Visa and MasterCard. All card companies expect merchants to accept responsibility for managing fraudulent activity. They do not care about how many chargebacks are disputed or reversed. What they want is for merchants (especially high-risk companies) to keep fraud minimal and under control.
All the more reason you should be vigilant of reviewing your online orders on a consistent basis – if not every day, then at least weekly. Acquiring banks already frown upon high-risk merchants with recurring billing. Putting preventative measures in place is necessary to ensure you prevent chargebacks from happening in the first place. It also benefits your business, because you curb your company from incurring chargeback fees and other penalties that eat away at your profit.
Tools and tricks
We are going to get into several tools and tricks you can use to beat friendly fraud and chargeback fraud.
Use a clear descriptor and refund policy
While friendly fraud may not be maliciously intended, it still costs merchants thousands of dollars in unnecessary fees annually. Having a clear credit card descriptor can help avoid some of these financial penalties. The best way to do so is to display your information clearly on the order page of your website in a visible area where your customer can see it. Make sure the descriptor is not too long or confusing; ultimately it should be relevant to your company from where customers buy. It also helps if you add the descriptor to any invoices or receipts sent to the buyer.
Additionally, your website’s policies and customer service agents should be communicating the exact same information to buyers. Go through your terms and conditions, and refund and cancellation policies to ensure they are transparent and not confusing in any way. If a refund is issued up to 10 days, clearly explain to the customer how long it will take to get their money back on their credit card. Plus, encourage them to call you back (not their bank) if they do not receive the money. Often times, merchants end up with double refunds. That’s because when customers aren’t reimbursed fast enough they call their banks requesting a chargeback. You want to communicate and make repayment as simple as possible to avoid this.
We have come to the end of part one of this blog series. But, stay tuned next week for part two when we explore more tools and tricks to fight friendly fraud and chargeback fraud. Meantime, we recommend you contact our team to assist you in reducing fraud and getting approved for your next merchant account. Contact DirectPayNet today!