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

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.

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

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Friendly fraud? Yes it exists.
Read this article in
QR Code to Subscription page
Start your subscription today