'I Didn't Buy That': Friendly Fraud Costs Retailers $11.8 Billion a Year

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The words "friendly" and "fraud" may not seem to go together, but friendly fraud -- also known as chargeback fraud -- is a real problem for a lot of online merchants. Friendly fraud happens when a customer fraudulently reports to their financial institution that a charge on their credit card isn't legitimate; the customer will typically be refunded the money immediately, leaving the merchant on the hook for the cash.

Friendly fraud may be intentional theft, like shoplifting, but some customers may do it accidentally -- reporting a charge because they don't realize another member of their household made the purchase or the charge information on their statement doesn't match up to a recognized retailer name, which can happen if the retailer uses a third-party payment system like PayPal. With identity theft at an all-time high and banks eager to reassure consumers that their identity (and their money) is safe with fraud protection guarantees, it's become increasingly easy for cardholders to use these protections to commit fraud.

Retailers Shoulder the Burden

Whether chargeback fraud is intentional or not, retailers are losing billions; Visa estimates $11.8 billion was lost to friendly fraud in 2012. For online merchants, who never physically swiped a card, it can be difficult to prove that a charge was legitimate -- making chargebacks a game of he said, she said, where the customer usually wins. What's more, if a merchant has more than 1 percent of their charges reversed as chargebacks, they can find themselves shut down by Visa (V) and MasterCard (MA) -- which can mean going out of business entirely.

As a result, businesses are fighting friendly fraud in a lot of different ways. To protect themselves from chargebacks, many merchants require customers to enter credit or debit card' security codes in order to prove ownership and physical access to the card. Some merchants will only ship to the address associated with a charge card, which can be a nuisance when purchasing a gift. Merchants are also more likely to fight chargebacks, putting the burden back on the consumer.

Why Customers Should Care About Friendly Fraud

Friendly fraud may sound like a problem for merchants, and not consumers. But friendly fraud affects all of us. The most obvious side effect is an increase in a merchant's cost of doing business, which is often transferred onto the consumer in the form of higher prices and shipping charges.

Friendly fraud is also what's making credit card fraud protection weaker. Instead of just taking a consumer's word for it, banks are treating fraud or identity theft inquiries more cautiously. So, at the very least consumers will have to jump through more hoops for refunds and, at worst, may be liable for fraudulent charges that can't be proven as such.

Fortunately, there's no reason to panic. As we mentioned, retailers are pushing hard to reduce friendly fraud. Unfortunately, that push probably means that common consumers will have to accept some inconvenience as both retailers and financial institutions work to make chargeback fraud more difficult.

So, have you ever disputed a charge on your credit card? Was the process easy or more time consuming than it was worth? Let us know your experience with "friendly fraud" or fraud protection in the comments below.


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'I Didn't Buy That': Friendly Fraud Costs Retailers $11.8 Billion a Year

One reason why Marquis' gas purchases might have triggered a fraud lockdown? Filling their tank is a common first move for credit card thieves.

"Some of the things they look at are small-dollar transactions at gas stations, followed by an attempt to make a larger purchase," explains Adam Levin of Identity Theft 911.

The idea is that thieves want to confirm that the card actually works before going on a buying spree, so they'll make a small purchase that wouldn't catch the attention of the cardholder. Popular methods include buying gas or making a small donation to charity, so banks have started scrutinizing those transactions.

Of course, it's not a simple matter of buying gas or giving to charity -- if those tasks triggered alerts constantly, no one would do either with a credit card. But Levin points to another possible explanation: Purchases made in a high-crime area are going to be held to a higher standard by the bank.

"It's almost a form of redlining," he says. "If there are certain [neighborhoods] where they've experienced an enormous amount of fraud, then anytime they see a transaction in the neighborhood, it sends an alert."

(Indeed, Erin tells me that one of the gas purchases that triggered an alert took place in a rough part of Detroit, which she visited specifically for the cheap gas.)

People who steal credit cards and credit card numbers usually aren't doing it so they can outfit their home with electronics and appliances. They don't want the actual products they're fraudulently buying; they're just in it to make money. So banks are always on the lookout for purchases of items that can easily be re-sold.

"Anytime a product can be turned around quickly for cash value, those are going to be the items that you would probably assume that, if you were a thief, you would want to get to first," says Karisse Hendrick of the Merchant Risk Council, which helps online merchants cut down on fraud. Levin says electronics are common choices for fraudsters, as are precious metals and jewelry.

Many thieves don't want to go through the rigmarole of buying laptops and jewelry, then selling them online or at pawnshops. They'd much prefer to just turn your stolen card directly into cold, hard cash.

There are a few ways that they can do that, and all of them will raise red flags at your bank or credit union. Using a credit card to buy a pricey gift card or load a bunch of money on a prepaid debit card is a fast way to attract the suspicions of your credit card issuer. Levin adds that some identity thieves also use stolen or cloned credit cards to buy chips at a casino, which they can then cash out (or, if they're feeling lucky, gamble away).
 

When assessing whether a purchase might be fraudulent, banks aren't just looking at what you bought and where you bought it. They're also asking if it's something you usually buy.

"The issuers know the buying patterns of a cardholder," says Hendrick. "They know the typical dollar amount of transaction and the type of purchase they put on a credit card."

Your bank sees a fairly high percentage of your purchases, so it knows if one is out of character for you. A thrifty individual who suddenly drops $500 on designer clothes should expect to get a call -- or have to make one when the bank flags the transaction. If you rarely travel and your card is suddenly used to purchase a flight to Europe, that's going to raise some red flags.

Speaking of Europe, the other big factor in banks' risk equations is whether you're making a purchase in a new area. I bought a computer just days after moving from Boston to New York, and had to confirm to the bank that I was indeed trying to make the purchase. Levin likewise says that making purchases in two different cities over a short period of time raises suspicions.

"I go from New York to California a lot, and invariably someone will call me [from the bank], " he says. Since one person can't go shopping in New York and California at the same time, any time a bank sees multiple purchases in multiple locations in a short period, it's going to be suspicious.

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