Digital Chargeback Management (1)

Customers Are Now the Biggest Fraud Threat to Merchants—How to Fight Friendly Fraud

During the meteoric rise of eCommerce, customer-first business models spawned unimaginable conveniences. Thanks to geniuses like Amazon’s ex-CEO Jeff Bezos, one-click payments and next-day delivery meant orders were always fulfilled and consumers never had to wait for anything. But that’s all changed.

More recently, the post-pandemic, inflation-ridden world is increasingly seeing customers frustrated by costly orders that are either stocked out, delayed, or even canceled. Supply chain woes mean that merchants are struggling with inventory bottlenecks. Meanwhile, customers are resorting to unconventional tactics to voice their discontent. In an eCommerce world that was once a source of comfort, friendly fraud is a reflection of growing consumer angst.

What is friendly fraud and how has it so quickly become a concern for merchants? Here’s a look at the state of play in the eCommerce ecosystem, why fraudulent chargeback management is something merchants need to prioritize, and what merchants can do to stay in the game.


The Build Up to Friendly Fraud
For a long time now, customer-first business strategies had everyone in a state of complacency. It worked for retailers who forged digital solutions that improved the customer experience. Casper made it possible to order a quality King-size mattress online and have it delivered in rapid time to your door. Warby Parker, an online retailer of trendy eyewear, supplied five pairs of low-cost designer eyewear to customers to try on in the comfort of their own home. Shopping had never been so easy!

Later, in 2020, online banking apps, food delivery apps, easy payments, and virtual doctor visits all conspired to make sheltering at home bearable during COVID, and eCommerce sales soared once again. During the pandemic’s peak, according to an analysis of Commerce Department data by Digitalcommerce360, ecommerce growth peaked at 18.8% in 2019, but in 2020, eCommerce growth peaked at more than twice that at 43.7%. That’s a 200% increase in less than a year.

Consumers grew comfortable conducting their business at home. Sure, there were inconveniences. Children weren’t allowed to attend school in person, millions were laid off, and the economy tanked, but buying stuff was not too much of a problem. Until now.

Since the last quarter of 2020 and throughout 2021, year-over-year eCommerce growth plummeted to between 7% and 9%. The shrinking labor supply caused by the pandemic has created havoc for transportation and logistics, and recent geopolitical crises like the Russia-Ukraine war and a COVID outbreak in China has compounded supply chain issues. Lastly, rapid inflation is hitting hard. 

All of these factors have conspired like a perfect storm, and both merchants and customers are battling multiple headwinds. In the case of consumers, friendly fraud—when a customer makes a purchase with a debit or credit card and then disputes the charge with their bank—is rife. According to Statista, in 2021, close to 40% of online merchants worldwide experienced friendly fraud. What’s the outlook then for eCommerce retailers? Are any of these elements within their control?


Is Friendly Fraud Preventable?
It’s tempting for a consumer to commit friendly fraud. Perhaps the goods they received were faulty. Or possibly their order was delayed, they went to a competitor, and now they want a refund. Perhaps a family member placed an order, and the cardholder was unaware. 

Many circumstances of a chargeback dispute are difficult for business to control—the economic circumstances of the consumer, frustrations with order delays, or genuine confusion with the many eCommerce transactions they make.

But friendly fraud has reached such heights that customers now pose a greater threat to merchants than criminals who steal their bank cards or identity, and merchants need ways to combat it.  A survey by found that friendly fraud occurs with “50% greater frequency than third-party fraud, fraudulent use of a stolen credit card, for example, and it’s costing online businesses billions of dollars per year.” 

Merchants can’t influence the COVID outbreak in China and boost the country’s manufacturing or supply of raw materials. They can’t speed up global transportation, the waterways, ports, or customs. And they can’t magically find workers to man customer-service operations. But while many of these factors are out of a merchant’s control, there are tools and strategies that they can apply to dispute resolution management. 

The following suggestions may not prevent a customer from committing friendly fraud, but they can reduce the costs and effects of customers’ chargeback actions.


What Merchants Can Do
The current crisis has crept up on everyone: retailers, consumers, suppliers, and policymakers. No one could have predicted COVID, its ripple effects on the labor market and the supply chain, the situation in China, or the current war in Ukraine. But in-roads are constantly being made toward new cybersecurity strategies and digital technologies, and merchants are rapidly adopting new solutions to stop the bleeding caused by fraud, friendly or not.

If customers dispute purchases, businesses lose inventory because the shipped goods are not returned. But friendly fraud affects more than inventory. Chargebacks don’t just mean losing the product’s value; they also create fees, penalties, and hidden costs. Thus, early intervention is crucial.


Practice Early Intervention
New digital fraud solutions can help you with early intervention. They can resolve a dispute before it becomes a chargeback. Two such solutions are Visa’s Verifi and Mastercard’s Ethoca. These tools notify you as soon as a customer initiates a dispute, which gives you time to take action. 

You can either refund the purchase or send information to the customer and bank to help them verify the transaction and cancel the dispute. Often, a customer has forgotten that they placed an order or were unaware that another family member used their card, so early communication is critical.

A digital fraud tool that uses machine learning can also prevent fraudulent transactions from occurring in the first place. Data reveal patterns in customer behavior and can identify customers more likely to engage in a dispute or request a refund. So, merchants can choose to decline a transaction in the first place.


Improve Customer Relationships
Banks impose chargebacks. If merchants can cut banks out of the picture by dealing directly with the consumer before a dispute is initiated, they avoid chargebacks and the associated fees. Also, by building relationships with customers through customer relationship management (CRM), the customer is more likely to contact the retailer if they have an issue rather than going straight to the bank to dispute a charge or payment. The result may still be a return and lost revenue, but the losses are mitigated.


Examine Your Return Policies
You might think the obvious way to go with a refund policy is to have a strict window for returns. In fact, the opposite might be a better strategy. 

A study by the University of Texas conducted in 2016 found that consumers are more likely to buy a product from a retailer with a lenient return policy (longer window, easier refunds). If that’s the case, a longer return window means more sales for the retailer, which is good. 

But the study revealed something else—the endowment effect. With the endowment effect, the longer a customer holds onto a product they have bought, the less likely they are to return it because they have developed an attachment. So, perhaps putting less pressure on consumers to return items quickly would reduce pushback in the form of chargebacks.


Be Proactive With Digital Chargeback Management
A customer-oriented business model that incorporates digital CRM and streamlined transactions are a must-have for today’s eCommerce retailer. They are easily integrated, improve the customer experience, and expedite conversions. Add to that a digital solution for friendly fraud and merchants can tackle one of the most visible and growing costs—chargebacks. 

Merchants are struggling to return to their pre-pandemic growth rates amidst labor shortages and supply chain woes. To find out more about how Ethoca or Verifi can help your business manage chargebacks, friendly fraud, criminal activity, and the complex eCommerce industry, partner with Cartis Payments. 

Cartis Payments is a merchant services provider that will streamline payment gateways, boost your fraud protection, and help you respond to the ever-changing customer.