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The Green SheetGreen Sheet

The Green Sheet Online Edition

February 09, 2009 • Issue 09:02:01

Friendly fraud raises fears

Editor's Note: This story was adapted from "The Recession Is Sending Rates of Friendly Fraud Up, Processors Say," as published by Digital Transactions News, Jan. 28, 2009. Copyright Boland Hill Media LLC. All Rights Reserved"

As unemployment rates soar and consumer spending shrinks accordingly, payment processors report that e-commerce chargebacks stemming from friendly fraud are increasing significantly. Friendly fraud is committed when a consumer who wants to escape liability for payment claims a valid credit card transaction was unauthorized.

And it isn't just online businesses that are damaged by cardholder fraud. Banks and other financial services providers, the card brands, payment processors and call centers are also prime targets for card fraud, whether it's from friendly fraud, skimming, phishing or identity theft scams. Additionally, the combination of rising chargebacks and falling retail sales is pushing some merchants above the allowable thresholds the card companies set for chargebacks.

Not the norm

Merchants who exceed designated chargeback limits are required to submit plans for bringing their chargeback levels down. Failure to control chargebacks results in card companies imposing fines on acquirers, who pass them on to merchants.

Redwood City, Calif.-based e-commerce processor Vindicia Inc. said it has also seen an increase in friendly fraud; however, Sanjay Sarathy, Vindicia's Senior Vice President of Marketing, said this is not unusual before and after the holiday shopping season, but he added that the "economic recession has exacerbated this trend, which is why we are starting to see some of our merchants whose friendly fraud is above normal."

Vindicia noted it can take up to 90 days to contest a chargeback, investigate it and determine whether it occurred for valid reasons or due to unethical consumer behavior.

The situation is aggravated given the lag time between the date of a sale and the arrival of the statement. During this time, the consumer contesting a particular transaction may have lost a job, been hit with a pay cut or reduced hours, or lost money from a bad investment.

Merchants disputed half of all fraud-coded chargebacks in 2008, up 47 percent from the year before, according to research by risk management firm CyberSource Inc. Of the chargeback cases CyberSource represented in 2008, merchants won 44 percent, the company attested.

Hard to prove

Friendly fraud is especially problematic for purveyors of online games, music and other digital downloads.

Product delivery can be difficult to verify, and this makes it tougher to defend against chargebacks. These factors can tempt consumers with financial woes to disclaim purchases.

"The balance of risk is now fluctuating at dangerous levels for acquiring banks globally," said Andrea Wilson, Chief Executive Officer of online payment provider First Atlantic Commerce Ltd. "Banks that never had merchants on the global chargeback monitoring program are now getting notification from Visa and MasterCard.

"Consequently, merchants are being fined for a situation they have absolutely no control over.

"In this current credit crisis market, the online industry as a whole needs to be far more proactive in pre-authentication of credit card transactions and staying ahead of consumers when it comes to friendly fraud loss." The Green Sheet, Inc.

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