A new survey by fraud prevention firm Sift reveals that chargeback dispute rates have skyrocketed 35% in the last year. However, the more shocking number is that nearly one in four of the consumers who filed a chargeback claim admit to committing “friendly” fraud, at an average of $192.53 per claim.
“As the economy cools down from historic highs, consumers are looking to save money however they can, luring many to resort to first-party fraud,” said Sift Trust and Safety Architect Brittany Allen. Allen said that the big three fraud categories are also among the largest spending categories and include clothing and electronics.
Typical friendly fraud scenarios
Friendly fraud can show up in any number of ways according to Chargebacks911.
The innocent versions might come from a mom who sees unknown charges on the family’s cell phone bill which she disputes, only to find out later that her son made several in-app purchases on a game that he plays on his phone. “Oops, sorry.”
In fact, things that appeal to children are the most frequent drivers of unauthorized family purchases, according to ChargebackGurus: in addition to in-app purchases in video games, there’s streaming video and music, one-click shopping options on sites like Amazon, and website subscriptions.
Other not-so-guilty versions are where:
The consumer has buyer’s remorse and, instead of contacting the merchant to convey that, they go the chargeback route instead.
The item or service wasn’t delivered.
The item or service was not as described (counterfeit, wrong color, etc.).
The merchant didn’t cancel a recurring payment when requested.
The sinful versions revolve around a cardholder trying to get something for free. Cyber-shoplifting, if you will.
Defrauders might wait a couple of weeks before calling the credit card’s issuing bank and claiming that they don’t know what the charge is. They request a chargeback and, effectively score a freebie.
Circling back to when children innocently make charges in-app that mom and dad don’t know about, there's also a wrongful flip-side called “first-party fraud” where family members – usually male, in their 20s, and struggling to make ends meet, knowingly make a purchase without telling the cardholder.
Another dishonorable version according to ChargebackGurus is when a customer wants a refund for whatever reason and the merchant won't give it to them. In many of those cases, the consumer files a dispute with the credit card company because they think that if the merchant ripped them off in the first place, the merchant would only lie or stonewall them if they asked for a refund directly.
Other consumers pay the price
Anyone who does even one friendly fraud chargeback is hurting their fellow consumer. That may sound like a stretch but with these chargebacks costing merchants more than $132 billion each year to eat the costs associated with fulfilling a chargeback, they have little choice but to shorten return windows, raise prices, and charge for returns to try and recoup those losses.
Unfortunately, tackling the issue gets even more tricky when a merchant’s customer becomes a fraudster. Until a customer is caught red-handed, merchants have little choice but to acquiesce because they don’t want to run the risk of losing a customer who may, in fact, be honest.
Whether they’re an honest customer or a deceitful one, the customer is in the driver’s seat and they use that to their advantage. Allen said the majority of consumers – 83% – are less willing to buy from a brand in the future if they have to file a fraud-driven dispute, and 50% say they’d never shop with a seller again if it failed to resolve their dispute within 30 days.
Playing with fire
Friendly fraud is a temptress. If a cardholder gets away with an underhanded chargeback, 40% are likely to do it again within 60 days. One mother-daughter duo became so enamored with the scheme that they disputed charges with 14 credit card companies to defraud everyone from Chanel to the Dollar Store to the tune of $850,000. They were last seen in court in handcuffs.
Anyone who thinks friendly fraud is their proverbial ship coming in is playing with fire and their own financial reputation.
If they’re discovered, there’s a lot that can happen, none of it good. Ken Tumin, the founder of bank account comparison site DepositAccounts, says that people who commit friendly fraud get hit from two sides.
The merchant may choose to blacklist the consumer in which the consumer is no longer able to make purchases from the merchant.
The bank may close the account of the consumer if they think the consumer may be committing chargeback abuse. A closure like that could result in a drop in a consumer’s credit score, but even more concerning is that person may have a tough time finding another bank that will welcome them with open arms.
Banks can make that heat hotter, too
Tumin said that bank account closures can also be recorded into ChexSystems, a company that provides information about the use of deposit accounts by consumers. “Someone who has too many negative marks in ChexSystems may find it difficult to open a bank account,” he said.
And the temperature can go up even higher.
Anyone thinking that a false chargeback is less serious than true fraud – such as stolen cards and identity theft – may want to consider another defense. Merchants will claim that they have to protect themselves from significant financial losses caused by chargeback fraud and, as the mom and daughter deceivers found out, the courts are showing no fear in taking their gloves off.
If you’ve committed friendly or chargeback fraud, it may be time for a good, hard look in the mirror – unless you think you look good in orange.
According to law firm Bachner & Associates, PC, making a false chargeback in most states is punishable with a fine or imprisonment. In general, the penalties for credit card fraud vary from one to three years in jail and a fine of $1,000 to $10,000.