Sarasota, FL, April 18, 2012 / Internal Release - There are many schemes used to defraud eCommerce merchants which can range from buying goods with compromised identity and payment account information to consumers using their real information and later abusing either the merchant’s return policies or their issuing bank’s chargeback and dispute process in attempts to keep both the purchased good or service and their money.
The latter, schemes known as friendly fraud or first party fraud, are difficult for merchants to protect against because the customer provides real and verifiable data points while the chargeback process tends to favor consumers over merchants. Here I discuss some common chargebacks that merchants may see when a customer is abusing the chargeback and dispute process to commit friendly fraud as well as measures merchants can take to prevent against them.
A common first party fraud technique is for a consumer to order a good or service providing their legitimate billing and shipping information, but after receiving shipment of the good they call their issuing bank and claim the order never arrived or the services were never rendered. Abusing this chargeback claim can enable the consumer to keep the merchandise while also receiving a full refund for the purchase.
The best way to prevent against these types of chargebacks is for the merchant to either require signature upon delivery or to use delivery confirmation which will provide the time, date and location of delivery. The United States Postal Services provides a description of their additional services that can be used to confirm delivery on their website. While signature and delivery confirmations provide excellent evidence for representing these types of chargebacks, it also increases the shipping costs which may not be feasible for merchants already working with tight margins.
Another method for combatting friendly fraud via non-receipt of goods chargebacks is to maintain warm lists of customers that have made such claims. Many consumers who claim to their issuing bank that a purchased item was never delivered or received are honest customers, but then again many are not. By maintaining a list of customer names, shipping addresses and other data points from orders that have claimed merchandise was never delivered or received allows a merchant to screen against this friendly fraud risk when a new order comes in. If the same customer, shipping address or other data point is associated with more than one of these types of chargebacks in a three month period, then it is likely this person is committing first party fraud and is not a customer you want to keep.
Merchants may receive any of the following reason codes resulting from Non-Receipt of Goods/Services chargebacks:
Visa: 30
MasterCard: 4855 (goods) & 4859 (services)
American Express: C08 (May also be coded as 155)
Discover: RG (May also be coded as 4755)
In a similar attempt to obtain free goods by abusing the chargeback process, a consumer may try to claim that the merchandise ordered is either defective or was damaged during shipment. In many cases the merchant will simply ship a replacement product and the friendly fraudster effectively gets a two-for-one deal. Like most friendly fraud chargebacks this can be difficult to prevent against, but the best thing a merchant can do is keep records of orders that make these claims and populate a warm list for the billing instruments, shipping addresses, phone numbers and other data points that are associated with orders claiming these types of chargebacks. As with all friendly fraud related chargebacks there are legitimate reasons and legitimate customers that make these claims – but it is unlikely that the same customer or shipping address would have this same problem in a three to six month time frame. If merchants can find a data sharing service that uses such warm lists they will have the benefit of seeing this customer’s past behavior with other merchants as well.
Merchants may receive any of the following reason codes resulting from Good/Service Not as Described/Defective chargebacks:
Visa: 53
MasterCard: 4853 (not as described) & 4856 (defective)
American Express: 030 (Retrieval Request)
Discover: RM (may also be coded as 4553)
Another route a consumer may take in attempt to perpetrate first party fraud is to act as though they never made the transaction when initiating the chargeback with their issuing bank. In general, card associations have different degrees of fraud related chargebacks: those where a consumer is making a direct reference to the transaction being third party fraud, those where a consumer makes an indirect reference to the transaction being fraudulent, and those where the consumer simply doesn’t recognize the transaction. When making a hard reference to fraud it isn’t uncommon for the issuing bank to require a signed statement or affidavit from the consumer attesting that the transaction was indeed third party fraud, but a consumer may instead initiate a soft fraud chargeback, such as saying they don’t remember making the transaction in question. When a merchant receives one of these chargebacks they can represent it with supporting evidence such as proof the consumer provided the correct Card Security Code, proof the consumer passed the AVS test and proof of delivery.
Merchants may receive any of the following reason codes resulting from Cardholder Does Not Recognize Transaction chargebacks:
Visa: 75
MasterCard: 4863
American Express: FR3
While friendly fraud chargebacks are a costly problem for eCommerce and other CNP merchants, it isn’t always a good decision to dispute, or represent, every chargeback believed to be unsubstantiated. The fact of the matter is, it costs money to represent a chargeback, and for most chargebacks on transactions under $50 it doesn’t make financial sense to dispute them. A merchant sometimes need to know when to cut their losses on the transaction and chargeback, and instead prevent that customer from doing future bad business by use of warm lists and hot lists.