Current Card Rules Make Cyber-Shoplifting Easy

Suffering from Chargebacks? Prevent Friendly Fraud

cyber thief
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If you sell anything online, there’s a good chance that you accept credit card payments (or payment tools like PayPal, which function similarly). Your customers love paying this way because it’s easy, and they know that the payment network will back them up if there are any problems. But you might find that some customers reverse charges without any good reason and end up getting something for nothing.

Are they doing it on purpose?

When credit cards (and online shopping) were brand-new, consumers needed assurance that they wouldn’t get ripped off – they didn’t want to send funds to a faraway business and simply hope for the best. Nowadays, that sense of security is still important, but some people have discovered that it’s relatively easy to abuse the system.

Presumably, it’s not news to these people that falsely claiming a chargeback is basically the same as stealing, and they seem willing to risk the consequences: potential legal troubles and appearing in databases of “bad” consumers (which will affect their ability to open accounts and shop in the future). But they still do it, resulting in headaches and higher costs for everybody.

To learn more about this practice and what it means for you, we spoke with Monica Eaton-Cardone, Co-founder and CIO of Chargebacks911. The interview is below:

Q: Why are chargebacks filed? How does this differ from fraudulent chargebacks?

There are two types of chargebacks that get filed by cardholders:  valid and invalid.  Each type goes through the same process, including the cardholder (customer) making contact with their bank or credit card company and stating a valid reason why they believe they deserve a refund for the transaction.

  Sometimes this process can be done online, but it usually happens over the phone.  Once the cardholder states their claim, the bank or credit card company representative files this as a "chargeback" and temporarily gives the money back to the cardholder while the transaction dispute is forwarded to the merchant for their right to either fight it or accept it.  If the merchant does nothing, the cardholder keeps the temporary refund permanently.

It is this behavior that rewards bad behavior resulting from "invalid chargebacks" - in other words, chargebacks that are processed based on inaccurate facts where the customer ends up reaping the benefits of being able to get something for nothing.

An invalid chargeback is any chargeback that was processed where the merchant was not actually at fault for anything and the cardholder never actually suffered from any sort of criminal activity either.  The issue with chargebacks is that they are based on the word of the cardholder initially, and this turns to stone if the merchant lacks the ability to defend themselves. This cycle has coined a new term: the "fraudulent chargeback" or as known within the industry, "friendly fraud".

Q: What is cyber-shoplifting?

Cyber shoplifting is no different than traditional shoplifting in that it is taking something with the intention to not pay for it.  This form of shoplifting is best linked to brick and mortar "refund fraud" - a term alone responsible for not only stressing large retailers such as Walmart, Target, and Costco - but also credited for their stringent refund policy changes.  Consumers have lost significant freedoms from the abuse of this crime, and it is starting to take effect online as well...

Refund fraud happens when a customer buys a product at a discount and then takes it to another store, to return it and get the full price back in cash.  It also happens when a customer buys a product and then fraudulently returns it, by either removing valuable parts from the box or replacing the contents with other contents in order to keep the merchandise for free.

Cyber shoplifting is similar in that the customer makes a purchase online and then claims a chargeback under a reason that is not valid.  Just like with refund fraud, this statistic grows due to the lack of human due diligence (i.e., not every box is inspected in detail, and not every chargeback case is verified before accepting).
 
Q: Why do banks give consumers the benefit of the doubt?

The problem with chargebacks is increasing is because there is a natural resistance to consider reforming the mantra "the customer is always right".

A primary statistic known to represent cardholder/customer satisfaction is the time it takes to resolve a transaction dispute.  Customers want fast resolution, and this speed comes at a significant cost. 
 
Q: How does cyber-shoplifting impact merchants?

In order to illustrate the effects of cyber-shoplifting toward merchants, it is important to realize the effect that traditional shoplifting has had on brick and mortar retailers; the effects are the same.

Many years ago department stores did not have security cameras and guards.   A shopper did not have to have their receipt checked before leaving the store, and you never had to worry about a checker accidentally forgetting to remove the security ink tag from a clothing item.  There were no [door] alarms either. 

In fact, not too long ago, certain stores provided 365-day return policies - you never needed to worry about saving a receipt, and your word was all it took to bring something back and get a cash refund on the spot.

Unfortunately, these privileges were abused and today's brick and mortar retailer is very different as a result - with consumers ultimately fitting the bill to finance these changes while losing their freedoms and shopping liberties too boot!

An online merchant faces the same challenges when encountering this type of abuse.  However; they are less sophisticated with defending themselves due to their maturity in comparison.  When cyber-shoplifting occurs, a merchant loses their merchandise, the transaction, advertising fees, overhead costs, and their liability in terms of payment processing is increased as well.

The payment industry today operates based on rules developed for a pre-internet age; therefore, "all chargebacks are created equal". The lack of evolution in terms of chargeback processing regulations and guidelines, have created increased liabilities for online merchants. Simply stated, due to this lacking part of the equation, there is a growing imbalance that collides with (current) unworkable formulas established by their predecessors.  In other words, what worked to solve similar problems in the past does not work today - the transaction world has evolved, and so must chargebacks.
 
Q: As a merchant, can I prevent or reduce fraudulent chargebacks before they happen?

Using best practices is one of the best defenses to help discourage this behavior.
 
Q: Why should banks reevaluate how they deal with chargebacks?

They will ultimately pay more long term.  The more fraudulent chargebacks increase, the more stress this will cause for merchants, and the more merchants will fight back. This cause and effect leads to increased costs and friction at the source point (the bank).

What’s a Vendor to Do?

So how can you run a business under current rules – should you just stop accepting credit cards and PayPal? That’s one option, but it’s not a realistic one. As you might imagine, the folks at Chargebacks911 and similar companies suggest using their services to help prevent and manage chargebacks - and those services are worth evaluating. At the very least, you should follow the best practices linked to above, be aware of the risks, and remember that a happy customer is less likely to make a claim. Finally, Ms. Eaton-Cardone suggests making changes to the existing banking practices so that it’s more difficult for cyber-shoplifting to take place.

Thanks again to Monica Eaton-Cardone at Chargebacks911 for sharing this information. Note that we greatly appreciate this information and hope it is helpful for readers, but we do not endorse Chargebacks911 or any other firm.