The Impact of COVID-19 on Credit Card Fraud Behavior - Part 1:
The economic fallout of the coronavirus pandemic has already been devastating and will likely continue to impact the global and national economy for months or years to come. Businesses forced to shutter their doors for weeks at a time, social-distancing mandates that make some services and retail transactions impossible, and the overwhelming fear preventing consumers from frequenting their favorite retailers are just some of the factors that have sent the economy reeling.
With these unforeseen hurdles thrust upon many brick-and-mortar retailers, it’s easy to assume that online merchants are safe from the economic impact of COVID-19. Unfortunately, though, e-commerce merchants are now facing their own kind of pandemic challenge: an uptick in online fraud.
In this article, we’ll explore the increase in friendly fraud in particular, and how it impacts the world of e-commerce.
No fraud is friendly. However, there is a clear distinction made between fraud committed by professional scammers and fraudsters, and fraud that is pulled off by consumers who find ways to cheat the system. Friendly fraud is often committed by otherwise loyal customers on a scale that is small enough to be forgiven as a one-time occurrence, but can be devastating for the merchant when it becomes a chronic issue. It occurs when a consumer receives goods or services and then demands a refund, or a chargeback, from their credit card company instead of making a return to the business which provided the product or service. The customer will claim that a delivered product or service was defective, not as promised, or was not delivered at all.
Friendly fraud can be difficult to detect as it involves just a slight deviation from the company’s standard return policy. The credit card company honors the customer’s request for a chargeback and then passes on the cost to the merchant, along with extra fees.
Now, with the coronavirus pandemic preventing many in-person returns, financial experts like the Mercator Advisor Group predict a surge in chargeback requests. Customers unable to seek a refund from in-store purchases will go directly to the credit card company that covered the cost of the transaction. Similarly, with more purchases being made online as brick-and-mortar storefronts are shuttered, consumers are more likely to return an item that turns out to be different than they’d imagined.
The prevalent financial uncertainty is another factor that will likely trigger a rise in friendly fraud. Purchases that were deemed essential just a month or two ago, may become extraneous in light of a new financial reality. The general atmosphere of financial instability might cause otherwise law-abiding customers to engage in friendly fraud.
Regardless of the cause, friendly fraud is on the rise—and merchants will be left to pick up the tab.
E-commerce merchants are especially vulnerable to friendly fraud as online purchases are frequently made via credit card and are often returned.
While most credit card companies offer fraud protection with zero liability for the cardholder, there is often very little protection offered to the merchant. When a business is victimized by friendly fraud, most credit card companies will force the business to cover the cost of the transaction as well as chargeback fees, which range from $20 to $100. The business will also need to cover the usual credit card processing fee of 1-4% of the purchase. These costs can add up quickly and can be especially devastating for small businesses which are already hurting from the nearly comatose economy of COVID-19.
Small businesses would benefit from revisiting their return and cancellation policies at this time. It may be financially prudent to allow looser guidelines for returns so as not to risk being billed for a chargeback fee. It’s also a good idea to reach out to credit card networks and explore their existing policies and fees.
Remote transactions should only take place with a clear and comprehensive record to prevent the occurrence of friendly fraud. Document a detailed description of the product before delivery so there’s no room for the consumer to make false claims about its condition upon arrival.
Finally, merchants can protect their businesses from friendly fraud by utilizing a fraud prevention service like FraudFix. FraudFix uses Artificial Intelligence and Machine Learning techniques which enable it to quickly and accurately adapt to sudden fraud pattern changes. We are committed to providing our clients with strong, dependable fraud protection through the pandemic crisis and beyond. Your complete fraud protection is our only priority.