Every year, like clockwork, merchants experience a sudden influx of chargebacks. From the beginning of January and almost into April, companies will get the ‘holiday hangover’ in which dispute volumes can rise by as much as 40 percent.
The reason for this isn’t hard to understand: after the holidays, many people return gifts, and many of them use the chargeback process rather than contacting a merchant directly, which can often involve packaging the item or returning it to a store. A chargeback is far easier, often involving only a phone call or an online form; and if you did in fact receive a fully working product, then you can keep it and get your money back. Economic uncertainty and job losses have all spurred ordinary people to commit friendly fraud, as has the general mood that has been driving the Great Resignation, a feeling that companies don’t benefit their employees or customers, so we owe them nothing in return. Global supply chain problems that cause delayed shipments will, in turn, cause customer dissatisfaction that will lead to increased chargebacks.
So now that the hangover is here what can be done? And what happens next?
A New Generation of Friendly Fraudsters
We know that 40 percent of people who file a chargeback dispute will do so again within 60 days, and half will do it again within 50. After all, it’s money for nothing—having your cake and eating it—and with successful disputes so uncommon and consequences so low, there’s little incentive not to.
That means that the surge of chargebacks around the holidays isn’t going to return to normal come April, but that it will create thousands of regular friendly fraudsters who, having experienced how easy it is to double their money through chargebacks effectively, will continue doing it. From there, the bandwagon effect will increase the number of regular friendly fraudsters even further, particularly when accelerated by social media. We have already seen how scams—including chargebacks—can spread virally online through hashtags like ‘scamtok’ and Reddit groups. The ‘scam bibles’ distributed in these sites often don’t just outline how to commit friendly fraud, which is fairly simple, but the loopholes at specific companies and how to get around chargeback disputes.
Therefore it’s vital for companies to stem the tide. If friendly fraud is easy—as is the case with most companies—people will a) repeat offend and b) tell their friends and social media followers about how easy and profitable it is.
Are You Making the Problem Worse?
As mentioned above, people feel that they can commit friendly fraud because they increasingly perceive large companies as being effectively scams themselves, with customer-unfriendly return policies and poor-quality goods that aren’t worth paying for.
If customers want to return goods and feel that the process is too time-consuming, they will inevitably turn to the much easier chargebacks process. The solution is clearly to have a simple, customer-focused return process—even if it means paying for shipping for returns or simply refunding a customer. Although it is obviously not ideal for a customer to order a $100 product and receive a $100 refund, a chargeback process could cost as much as $313 when fees and admin are accounted for.
With supply chain problems causing disruptions to deliveries, it is more important than ever to make sure that you communicate delivery times clearly, update customers if deliveries will be late, and offer the ability to track packages wherever possible. Fraudsters often piggyback onto wider social trends, so they will be more likely to use delivery problems as a reason, but this can be countered by showing chargeback claimants that their deliveries are either in transit or have been delivered.
If your company can solve the various problems that can give rise to chargeback claims and close any loopholes in your procedures, then chargebacks should be reduced but not eliminated, especially around the ‘Holiday Hangover.’
Reducing them to the point where friendly fraudsters consider it too risky to attempt to defraud your company is difficult to do alone, but there are third-party anti-fraud companies who can make the process much easier. Companies can receive so many chargebacks—especially at this point in the year—that responding to them ‘by hand’ would be impossible, or at least time-consuming, so modern anti-fraud solutions leverage machine learning and data sources that aren’t available or are difficult to access. At their simplest they can spot repeat offenders, but their sophistication is growing all the time as artificial intelligence ‘learns’ the signs of fraud.
We may be years away from reversing the overall trend of chargebacks and other forms of fraud growing in an increasingly digital economy, but companies can start turning the tide by improving the customer focus of their processes and using third-party fraud solutions
Monica Eaton-Cardone is the Chief Operating Officer of Chargebacks911 and Fi911 and Chief Information Officer of Global Risk Technologies. She has worked tirelessly to educate merchants and financial institutions about hidden threats in the rapidly changing payment fraud landscape.