The other online fraud

Chargeback fraud illustrationShortly before New Year’s Day, Michael McLeod spotted a curious ad on Gumtree, a UK-based online classified advertising site.

A private seller was offering, at full retail price, a brand-new 12W2F Workout Station, the most expensive product made by McLeod’s employer, The Jim Bradley Speedball Company, a small sports equipment manufacturer in Melbourne, Australia.

To McLeod, three things made the ad stand out. First was the fact that McLeod had personally delivered the product to the buyer on the same day the ad appeared. Second was the fact that the buyer claimed not to have received the product, resulting in a credit to his account from Visa. Per Visa’s policy, the credit came out of The Jim Bradley Speedball Company’s pocket. Third was the fact that the company had been the victim of another, substantial chargeback fraud only a few weeks earlier.

Usually when I write about fraud, I focus on high-tech bad guys upping the hacking ante, and on card fraud taking place at the point of sale. But chargeback fraud deserves attention it is own right. It was estimated in 2014 to have cost retailers worldwide upwards of $12 billion annually, and, according to the 2016 LexisNexis® True Cost of Fraud℠ Study showed a 42 percent increase between 2015 and 2016. The same report estimates that the real cost of every chargeback dollar is more like $2.40 when you take into consideration fees and merchandise replacement.

Ironically, chargeback fraud is the product of good customer service. In the event of a disputed online credit card purchase, it is in the best interest of credit card issuers not to make things difficult for the customer. So when a customer says, for instance, “I never received the product,” “the product arrived damaged,” “the product wasn’t what was advertised,” “I never ordered that,” or “I didn’t understand there would be a recurring charge,” the likes of American Express, Visa, and MasterCard generally accept the claim at face value and dock the merchant. If in fact the customer received the merchandise, he or she gets the refund and can keep the merchandise. The merchant can appeal, however, proving a claim false is easier said than done and often more costly than simply eating the cost.

Chargeback fraud sometimes shows up in the form of so-called friendly fraud, that is, consumers with honest intentions who are unaware they’ve committed fraud. A customer may forget having placed or received an order. Or, since it’s not unusual for an ID on a statement not to match a company’s public name, the customer may innocently deny having done business with them. But “friendly” doesn’t mean “not costly” or “not serious.”

For the less-than-honest, the ease of getting away with chargeback fraud offers considerable appeal. It is a form of online shoplifting, albeit less risky, and it’s growing. Not surprisingly, in the fraud/fraud-prevention arms race, a number of companies now offer chargeback fraud detection systems.

Financial institutions would do well to coach merchants on ways to remain alert to and prevent chargeback fraud. Though a “customer is always right” ethic is what enables chargeback fraud, it’s important to remember that merchants are customers, too.

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