Friendly fraud and chargeback fraud is so common these days you might think it’s just a necessary evil when running a business.
Chargebacks are every business’s worst nightmare and chargeback fraud costs eCommerce businesses billions of dollars a year. Loss of sales revenue aren’t the only costs. There are also fees associated with each chargeback as well as increased costs by your merchant account for processing if your business regularly experiences increased chargebacks. If your business exceeds 1% of its monthly sales volume in chargebacks you can be put on the high risk list which will end up costing you a lot more for your merchant services.
Chargeback fraud and “friendly” fraud are terms that are sometimes used interchangeably but they are different and the difference is important.
We’re talking about the difference between friendly fraud and actual bad-guy fraud. Because of the fact that 71% of all chargeback fraud is actually from your legitimate customers and not hackers and thieves it would behoove you to take steps to mitigate this from happening and ultimately help keep your losses at a minimum.
First let’s talk about what friendly fraud refers to.
These are generally good customers who may buy from you again. Most of the time it is an honest mistake where they just didn’t recognize your merchant name or forgot they ordered something or had every intention of cancelling that recurring bill before the next time and then life just gets away from them. There is also the fact that people sometimes just don’t want to deal. It is easier to call their card company and ask for a chargeback than it is to call you and have to complain or explain why they don’t want your product or be worried they are going to have to argue with customer service and beg “please, please give me a refund“. It is the card issuers job to satisfy their customer, so it is much easier to call them and experience great customer service than it is to call you.
Actual Chargeback fraud refers to a different kind of person entirely.
This refers to a customer who actually has malicious intent. They order a product or service and receive and begin to use the service only to file a chargeback through their credit card company with the purpose of getting their money back while they keep the product. Other customers may have decided to buy a product or service and then decides they don’t want it anymore but have passed the allotted refund time or just don’t qualify for a refund. They use the chargeback feature of their credit card as a loophole, or way around not being eligible for the refund through the business to ultimately get their money back
Every time a customer files for a chargeback with their credit card company it is given a “reason” code.
These codes generally fall under one of two categories: fraud or non-fraud. If the customer believes there has been fraudulent activity such as the case of credit card theft or identity theft or authorization discrepancies it would be coded under fraud. Non-fraud would include complaints such as unauthorized recurrent billing where the customer will claim they weren’t aware they were signing up of recurrent billing. Sometimes it’s just a case where the cardholder may not recognize the business name on their statement as someone they’ve purchased from. Often the customer is not happy with the product or services so they will use the chargeback code for merchandise received was not as described. Another common non-fraud code refers to shipping problems such as merchandise has not arrived.
They call this type of fraud “friendly” because people don’t really set out with malicious intent. People tend to forget about the bill, especially with digital products where there is no physical reminder that shows up in the mail. A customer goes paperless and signs up for a digital magazine or a video series, perhaps. A few months down the road the cardholder notices a charge, can’t really remember what it might be for, (or realizes they never logged in and used that yoga video subscription) and applies for a chargeback.
Managing chargebacks can take up a considerable amount of a business’s resources. It’s not unheard of for an employee to spend around 2 hours responding to a single chargeback. Even though there is a significant amount of cash at stake it is still important for employers to focus on running their business instead of spending all their time and resources managing chargebacks. A much more efficient approach is to figure out how to reduce the number of chargebacks you get in the first place.
There are a number of practices that can be put in place from the beginning to help mitigate chargebacks where they begin.
When you implement these chargeback management practices from the start you will able to nip it in the bud before it happens thereby limiting the loss of income as well as the time spent responding to them.
Be selective when choosing your payment processor. You don’t just want to go with the one who is offering you the lowest prices. You will have a much better deal in the long run if you partner with a payment processor that can provide effective risk management support and demonstrate a thorough understanding of Internet fraud risk and liability. Make sure they have a great risk management track record.
Risk management is all about employing a strategy.
Make sure your employees understand the risks of fraud thoroughly and know the chargeback rules and regulations. Implementing best practices can help to ensure, for the record, that the purchase was intended making it more difficult for the customer to win the chargeback. There are a number of strategies you can implement that begin before the sale happens and continue till long after.
One of the first ways you arm yourself against friendly fraud chargebacks happens before the sale is ever made.
Clearly and accurately describing your product, including reviews and any extra resources that you can ensures that your customer clearly understands what they are purchasing. If it is services you offer make sure that your services live up to the promises the description makes. This may all seem like common sense but you’d be surprised how many business owners just assume their customers understand what they are offering. Put some real thoughtfulness into your product descriptions.
At the time of purchase there are a few safeguards you can put in place to help you prove the customer actually made a legitimate purchase. Utilize the powerful tools that Visa/MasterCard offer to prevent fraudulent transactions such as CVV and AVS. CVV stands for Card Verification Value and is used by merchants to prove the card exists. Since the CVV code appears on the reverse side of the card it is a number only card member should have. In the case of chargebacks you would be able to use this information to prove that the purchaser knew about and intended to make the purchase. AVS is the address verification service and is used to ensure that the billing address that is being used by the purchaser is the same as the one on file for the card. In the case where this is a true fraud the purchaser may have stolen the card and may not have the correct address. This type of verification may help to alert you of credit card fraud and ultimately save you a chargeback when the cardholder realizes the fraudulent charge.
Sales confirmation and subsequent receipt for purchase is the next place where you have an opportunity to solidify the purchase in the customer’s mind. Both the order summary and the receipt should have a detailed list of what was purchased and/or agreed to. Right before the sale is finalized, just before they click confirm sale, the inclusion of a check box where the customer “agrees” to terms of service at the bottom of the sales confirmation page is a step you can implement to prove that you made every attempt possible to inform the cardholder of the rules and terms of their purchase. And if it is a service that requires a recurring bill make sure that the words “recurring transaction” is VERY CLEARLY written on their first receipt for purchase. Make sure that it includes the recurring amount that will be charged as well as the frequency for which it will happen. And lastly it is important to include your policies for the subscription and its cancellation.
Since the code for customer not recognizing the merchant descriptor is one of the most common reasons for a chargeback there are steps you can take to limit this from happening.
Make sure that your merchant descriptor on their bill shows a business name that the customer will recognize. Make sure that it includes either your website URL or a customer service number. You may also want to take advantage of a 25 character dynamic merchant descriptor that can be catered to the customer’s specific order. You will go a long way in mitigating a chargeback of the customer can recall the specific item or service purchased through more detailed transaction information.
Shipping is another opportunity to interact with the cardholder after the purchase and provide superior customer service. Make sure you are always tracking your shipments and providing that tracking number to your customers. You will want to utilize “delivery conformation” as well. This will allow the tracking and delivery to be traced to the specific location and time an item was left for a customer. Also making sure you have a system setup for notifying the customer of any delays that may affect the arrival on your end will keep the customer informed and limit the chance they will file a chargeback based on item not being delivered. Some people are very impatient and keeping them involved will limit the chance they’ll just think “my package never came so I’m going to get my money back as soon as I can”. With tracking information the delivery service, such as UPS, will send a notification to the recipient if they have a delivery delay such as weather. Of course this won’t be much help against a malicious fraudster, they will just say it was stolen from the front porch by a passerby or a neighbor. It happens.
Post sale follow up. Don’t miss the opportunity to make sure your customer is happy once they have received the product.
Send a follow up email asking them if they are happy with their purchase and include easy to find customer service numbers and website links where they can file a claim or email customer service in case that is their preferred form of communication.
When it comes to recurrent billing it’s shocking how many businesses do not have a system set up to remind their customers. Making sure that you send a pre-charge reminder email is one of the easiest things you can do to limit the chances for a chargeback. In fact it’s one of the main Best Practices that Visa suggests…“As a best practice, routinely notify cardholders of regular recurring transactions charged to their Visa account at least ten days in advance. The advance notification should include the amount to be charged to the account and where necessary, alert the cardholder if the transaction amount exceeds a pre-authorized range. Local law may impose specific requirements for this notification,” according to Visa guidelines. This will allow the customer time to plan for the charge, it also allows your customer service an opportunity to save the sale if the customer does call to cancel. In the end it is still much better to lose a sale than have to deal with chargebacks on your accounts.
In a society where people are constantly on the go it is no surprise that we gravitate to the path with least resistance. It is simply just easier to file a “no-hassle” chargeback with the card company then try to call and deal with customer service.
A recent study showed that as much as 81% of people filed a chargeback simply because it was more convenient.
Make sure that you operate with transparency. Offer quick links for customer service help and cancellation information. Along with offering easy cancellation options, you may want to also offer refunds. Offering a refund within a certain time frame or even a prorated price for services may seem like you will lose money, but a customer is more likely to call instead of just applying for a chargeback if they feel comfortable and confident that they can receive a refund. It also allows you the opportunity to create a relationship with the cardholder. If a customer feels like they are appreciated and have been treated fairly they are more likely to come back to you again. Besides avoiding the chargeback you have possibly earned a repeat customer.
Most business owners lose the chargeback fight simply because they miss the deadline to respond to the chargeback. Make sure you are staying on top of your correspondence with your processor at all times. They are there to help keep you informed. Understand chargeback reason codes so you can identify whether a chargeback is really one of your good customers being lazy. Make sure when you do have a chargeback you take the time to submit a compelling, data-rich response. This gives you the opportunity to turn a chargeback into a refund, help you nurture the relationship with your customer and save your merchant account.
Obviously the main goal in running a successful business is happy customers. Take the time to implement these best practices within your business. An hour of your time today, that could result in saving you thousands, is better than two hours later responding to a chargeback. Call your processor now to see what they can do to help you reduce the instance of friendly fraud. Better yet, call Bankcard Brokers and let us lead you to a more successful business model and your customers will be happy ever after.