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How Customer Expectations Contribute to Fraud and Losses

By Monica Eaton-Cardone
Apr 25, 2019 9:44 AM PT
customer convenience must be balanced with reasonable measures to prevent e-commerce chargeback fraud

Contemporary online retail enables faster, smoother and more profitable interactions between consumers and merchants. Individuals can shop and make purchases at any time, from any location, with the help of the devices resting in their pockets. Plus, with innovations like same-day shipping, IoT-connected devices, and much more, it's never been easier to be a consumer.

As a merchant, you have a vested interest in streamlining the customer experience and minimizing friction wherever possible in the purchasing process. There are downsides to this premise, though.

For example, the speed and ease of access to online shopping created a culture of instant gratification. This culture was not accompanied by a broader discussion of the expectations, protections and responsibility that every party carries, though. That disconnect has significant ramifications for businesses and consumers alike, with a financial impact totaling billions of dollars every year.

The Problem With Convenience

We obviously tend to think of increased convenience in a positive light. After all, removing friction from the process and making sales faster and easier is a benefit for consumers, as well as for the merchants who sell to them. How could convenience be a bad thing?

The problem is that, simply put, online fraud is a serious concern. Despite the risk, though, the expectation of ever-increasing convenience has led to a situation in which businesses and consumers alike prioritize convenience over due diligence. Fraudsters employ increasingly sophisticated tactics to abuse consumers, constantly adapting to stay ahead of fraud detection tools.

Let's look at identity fraud as an example. The number of victims in the U.S. increased by 8 percent in 201, rising to 16.7 million individuals, according to Javelin's 2018 Identity Fraud Report. Fraudsters can deploy phishing tactics to steal consumers' information, and the consumers, not trained to perform due diligence for personal protection, fall for the trap. In total, fraudsters managed to steal US$16.8 billion through identity theft during that period -- and that's just one of many potential points of attack.

Of course, customers do have some recourse when fraud occurs. Buyers can file chargebacks, which are forced payment reversals. Chargebacks empower the cardholder's issuing bank to claw back the funds from a transaction if that transaction is found to be fraudulent. As we'll see, though, this state of affairs creates more problems than it actually solves.

Enables a Sense of Entitlement

When consumers fail to secure their personal data and online accounts, they're not acting according to security best practices. However, they feel entitled to do this by the culture of convenience surrounding e-commerce. This behavior is reinforced by the proliferation of "zero-liability" accounts and other standards that shift liability away from buyers.

In the customer's mind, they expect others to reimburse their losses when fraud occurs. If customers don't feel vulnerable to fraud, then they don't feel the pressure to try to avoid it. Banks and card networks encourage this consumer entitlement by absolving customers of financial responsibility. This combination of circumstances has led to the rise of what we call "friendly fraud" over the last decade.

Unlike the more conventional forms of online fraud that most readers are familiar with, friendly fraud is a form of chargeback abuse practiced by cardholders. The buyer makes a purchase, then later files a chargeback without proper justification. It could be due to confusion about the merchant's return policy, buyer's remorse, or even a very simple misunderstanding. In any event, the end is the same: The customer gets something without paying for it, and the merchant loses both merchandise and sales revenue.

We have a clear double standard in the chargeback system as it is now. The burden of preventing fraud falls on merchants, regardless of whether the incident is their fault. It's gotten to the point that a mechanism intended to protect consumers from fraud now enables it instead.

Chargeback abuse distorts the e-commerce marketplace, determining "winners" and "losers," while making it more difficult to produce reliable data about fraud.

Short-Term Losses, Long-Term Threats

Friendly fraud seems like an annoyance for merchants at first glance. After all, when consumers file chargebacks without reason, it costs sellers their hard-earned revenue and any merchandise shipped. Still, are chargebacks really that big a deal? Absolutely.

The effects of each dispute go beyond the lost revenue. For example, the average merchant acquirer assesses a fee for every chargeback, no matter the card brand involved, to cover the cost of chargeback administration. These fees add up quickly as chargebacks mount.

Then there's the risk of breaching chargeback thresholds. The chargeback threshold is a limit imposed on merchants at the card scheme level. Visa and Mastercard dictate the acceptable threshold. For several years, both thresholds stood at 1 percent of transactions and at least 100 transactions per month.

In October 2019, though, Visa actually will lower its threshold, making it harder to remain in compliance. This is serious business; if you can't remain within the acceptable range, your acquirer will restrict or even terminate your account. Even worse, you may end up on the MATCH list, blacklisting you from getting another standard merchant account.

It's not just bad for merchants, though. Chargeback abuse has negative ramifications for everyone:

  • Card Networks: More reports of fraud occur on their networks, distorting fraud data and making it hard to develop viable, useful policy.
  • Issuers: Banks find themselves bogged down with an ever-increasing number of chargebacks, making it difficult to apply due diligence and resolve cases.
  • Acquirers: As merchants breach thresholds, acquirers and processors run the risk of losing their customers.
  • Consumers: Honest consumers ultimately pay more for goods and services due to increased operating costs and stifled competition in the e-commerce market.

Customer expectations have a dramatic, real-world impact, and we can't afford to let this problem go unaddressed any longer. What we need is a two-part solution: We need to overhaul the chargeback system to ensure the future sustainability of e-commerce, while redefining consumer expectations.

Standardizing the Chargeback Process

A major obstacle standing in the way of improved chargeback processes is the lack of standardization. How we manage chargebacks at present is very inconsistent; each scheme has its own rules and processes. This makes it impossible to develop the kind of consistent, long-term solutions we need in the e-commerce space.

Lack of standardization creates even more problems down the road, as it leaves banks to interpret the chargeback regulations handed-down by the card schemes. In turn, merchants have to interpret the information they get from banks, adding even more layers of confusion. There's no consistency, so there's no expectation or guideline for how to design and implement new tools or processes, or to adjudicate disputes.

The solution is coordination between merchants, banks and card schemes. This will make it possible to develop the widely applicable standardized processes we need. Recent chargeback overhauls like Visa Claims Resolution and Mastercard Dispute Resolution are moves in the right direction.

However, we're going to keep having problems until we achieve a more consistent set of guidelines for how to handle chargebacks. In the meantime, it's up to you to protect your business.

Take Action Against Chargebacks

You can be proactive about fraud and chargebacks by adopting a more comprehensive, multilayer strategy. The key is a two-fold approach: Prevent incidents wherever possible, and then respond to those you can't prevent with a tactical approach.

Chargebacks rooted in criminal fraud or simple merchant errors are preventable, assuming merchants deploy the right tools and business best practices. For example, you should do the following:

  • Answer all phone calls within three rings.
  • Provide 24-hour customer service, seven days a week.
  • Ensure all return policies are easily accessible from every page of your site.
  • Offer fast shipping, along with tracking and delivery confirmation.
  • If you offer subscriptions using negative billing, make them "opt-in," rather than "opt-out."
  • Consider offering bonus credit for customers willing to exchange goods for store credit. This will incentivize customers to exchange goods, rather than potentially file a chargeback.

Yes, these practices accommodate consumers' expectations of increased convenience. However, I want to distinguish between unreasonable expectations on your customers' part and reasonable measures to provide a better customer experience. As a seller, you should aim to offer a more convenient, enjoyable customer experience -- so long as it's still possible to provide security and encourage responsible customer behavior.

Of course, even if you take steps to address chargebacks, the fact remains that friendly fraud isn't likely to go away any time soon. That's why you need to respond agilely through chargeback representment.

Representment works differently depending on the card scheme; as mentioned above, Visa and Mastercard use different frameworks for handling chargebacks on their networks. However, the basic, litigation-based process involves using evidence to counter a customer's claim and overturn a chargeback.

Some merchants choose to go it alone and assemble evidence, submit documentation, and communicate directly with an acquirer to manage disputes. This is a complicated and time-consuming process. Most merchants, even those who have their own internal chargeback management teams, find it hard to make self-management cost-effective.

Others turn to professional chargeback management instead. A chargeback management service can distinguish between friendly fraud and legitimate chargebacks, ensuring you don't end up fighting customers who are actual fraud victims.

Then your service provider can deploy the right tools and strategies to win disputes and minimize the risk of chargebacks going forward. Obtaining specialized expertise can result in more efficient allocation of staff and resources, as well as better long-term revenue retention.

Take Steps to Stop Chargebacks and Fraud Now

Unfortunately, things will get worse before they get better. Tackling consumer entitlement by fighting back against friendly fraud and establishing clearer standards for customer responsibilities isn't going to win any fans in the short term. It's in everyone's best interests, though, including the customer's, to take those steps.

We need to have clear, defined standards for how consumers and merchants interact. Otherwise, the issues present in the e-commerce market now will get worse, and that will have a profound impact on e-commerce in the future.


Monica Eaton-Cardone is an international entrepreneur, speaker, author and industry thought leader. She is the cofounder and COO of Chargebacks911, the first global company dedicated to mitigating chargeback risk and eliminating chargeback fraud.


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