Friendly fraud? Yes it exists.

Friendly fraud may be intentional theft, like shoplifting, but some customers may do it accidentally — reporting a charge because they don't realize another member of their household made the purchase.

Jason Reed/Reuters/File
Visa credit cards are displayed in Washington. Visa estimates $11.8 billion was lost to friendly fraud in 2012.

The words "friendly" and "fraud" may not seem to go together, but friendly fraud — also known as chargeback fraud — is a real problem for a lot of online merchants. Friendly fraud happens when a customer fraudulently reports to their financial institution that a charge on their credit card isn't legitimate; the customer will typically be refunded the money immediately, leaving the merchant on the hook for the cash.

Friendly fraud may be intentional theft, like shoplifting, but some customers may do it accidentally — reporting a charge because they don't realize another member of their household made the purchase or the charge information on their statement doesn't match up to a recognized retailer name, which can happen if the retailer uses a third-party payment system like PayPal. With identity theft at an all-time high and banks eager to reassure consumers that their identity (and their money) is safe with fraud protection guarantees, it's become increasingly easy for cardholders to use these protections to commit fraud.

Retailers Shoulder the Burden

Whether chargeback fraud is intentional or not, retailers are losing billions; Visa estimates $11.8 billion was lost to friendly fraud in 2012. For online merchants, who never physically swiped a card, it can be difficult to prove that a charge was legitimate — making chargebacks a game of he said, she said, where the customer usually wins. What's more, if a merchant has more than 1% of their charges reversed as chargebacks, they can find themselves shut down by Visa and MasterCard — which can mean going out of business entirely.

As a result, businesses are fighting friendly fraud in a lot of different ways. To protect themselves from chargebacks, many merchants require customers to enter credit or debit card' security codes in order to prove ownership and physical access to the card. Some merchants will only ship to the address associated with a charge card, which can be a nuisance when purchasing a gift. Merchants are also more likely to fight chargebacks, putting the burden back on the consumer.

Why Customers Should Care About Friendly Fraud

Friendly fraud may sound like a problem for merchants, and not consumers. But friendly fraud affects all of us. The most obvious side effect is an increase in a merchant's cost of doing business, which is often transferred onto the consumer in the form of higher prices and shipping charges.

Friendly fraud is also what's making credit card fraud protection weaker. Instead of just taking a consumer's word for it, banks are treating fraud or identity theft inquiries more cautiously. So, at the very least consumers will have to jump through more hoops for refunds and, at worst, may be liable for fraudulent charges that can't be proven as such.

Fortunately, there's no reason to panic. As we mentioned, retailers are pushing hard to reduce friendly fraud. Unfortunately, that push probably means that common consumers will have to accept some inconvenience as both retailers and financial institutions work to make chargeback fraud more difficult. So, have you ever disputed a charge on your credit card? Was the process easy or more time consuming than it was worth? Let us know your experience with "friendly fraud" or fraud protection in the comments below.

Elizabeth Harper is a features writer for Deal News, where this article first appeared: http://dealnews.com/features/What-the-Heck-Is-Friendly-Fraud-and-Why-Is-it-Costing-Retailers-11.8-Billion-/1002114.html

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