As merchants crack down on fraud, resources to help investigate and recoup their losses from so-called “friendly fraud” are on the rise, helping to thwart the trend, observers say.
Friendly fraud occurs when a consumer purchases an item and claims not to have received it, and then requests a refund through a card charge-back. It occurs most often in online transactions and among large merchants, observers say.
The growth in such fraud appears to be waning. Among 1,006 merchants Javelin Strategy & Research surveyed online in June on behalf of Reed Elsevier Inc.’s LexisNexis Risk Solutions, 10% reported an increase in friendly fraud, down from 19% that did in 2009.
But the problem is worsening for large e-commerce and online-only merchants earning $50 million or more in annual sales. Among such merchants, 23% reported an increase in friendly fraud last year. By comparison, 16% of midsize merchants with $5 million or less in annual sales saw an increase and 7% of small merchants with annual sales of $1 million or less did last year.
Friendly fraud accounts for 19% of fraud losses among all merchants, but it rises to 23% of all fraud for large e-commerce or online-only merchants, according to the study.
Credit cards are used most often in all types of fraud, accounting for 43% of merchants’ fraud losses, followed by checks at 26%, debit cards at 22% and alternative payment methods such as PayPal at 9%.
The four leading credit card networks and the three major credit bureaus long have worked together to report repeat instances of suspicious charge-backs through steadily improving technology. And more companies are offering specialized services to merchants seeking additional help in investigating and recovering losses from friendly fraud.
U.S. Digital Transactions Corp., a New York-based payments-consulting firm, in January launched a “charge-back recovery” service for merchants in which it promises to investigate suspicious charge-backs for a flat fee of $39.95 or assist in the investigation and collections associated with friendly fraud. For larger collections, the firm will negotiate with the merchant to take a percentage of what is ultimately collected, says Greg Wooten, the company’s CEO.
“Typical collection agents are not familiar with the intricacies of credit card network rules on charge-backs, and a growing number of merchants are looking for specialized help in this area as they seek to put an end to it,” Wooten tells PaymentsSource.
Investigators typically research delivery-signature data and other databases to secure valid addresses and online records to determine whether a customer actually received, or used, the goods in question.
Receivable Management Services Corp., another longtime player in helping merchants investigate and recover losses from suspicious charge-backs, also has seen a rise in demand from merchants looking to block friendly fraud, says Darren Hewson, vice president of business development for the Bethlehem, Pa.-based firm.
“Friendly fraud is on the rise in some sectors, but the card companies and merchants are getting smarter about it,” Hewson tells PaymentsSource. “Better systems and more resources attacking the problem mean that people who try friendly fraud might be likely to get away with it one time, but they are less likely to repeat it.”
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