Since the EMV liability shift in October 2015, merchants have had their fair share of things to consider. Beyond the logistics of preparing a shop to accept EMV cards, many retailers have had a rude awakening when fraud does occur at their establishment despite the new technology.
Without an EMV terminal, they are more at risk for point-of-sale fraud. Plus, the shift has spurred an increased amount of other kinds of fraud, such as card not present issues and account takeover. Another type of fraud occurs even after a sale is completed successfully and everything looks to be working smoothly: friendly fraud.
The nice-sounding name is quite deceitful, as are the people who engage in this type of fraud. It is done when a person goes to a store and buys an item. He or she waits until the credit card statement comes in, then claims that he or she never made the purchase, demanding a refund.
According to Payments Leader, merchants that are not set up for EMV transactions are ill-equipped for these situations. Regardless of whether or not the store can provide a signed receipt, or sometimes even when there is photo or video evidence of the sale being legitimate, the retailer can wind up giving the fraudster his or her money back. In fact, a study by the Federal Reserve Bank of Kansas City found that merchants only win between 20 and 30 percent of these cases.
Prevalence of friendly fraud
Though chargebacks are meant to protect consumers from fraud aimed at them, many are clearly abusing this service. According to the study, about half of all chargebacks are fraudulent.
Prior to the EMV liability shift, friendly fraud was a growing problem. Around 10 months before the shift, CBS News reported that only 14 percent of chargebacks were legitimate, and that friendly fraud had grown 41 percent since 2011. Now that it's even easier to target merchants that have not updated to a new EMV-friendly POS terminal, this number could continue to increase.
Friendly fraud is more than deceitful and time-consuming for merchants. It actually costs them a lot of money. Digital Transactions explained that not only is the merchant responsible for refunding the customer's money, but they are also issued a fee of up to $100. Merchants lose almost $12 billion every year due to friendly fraud, according to PaymentsSource.
There are two main ways friendly fraud can occur. While most instances of chargeback fraud are deliberate, there are accidental incidences as well. This can occur when someone makes a purchase with a card but doesn't recognize the way it shows up on their statement. It can also happen when a relative with access to a card makes a purchase without telling the primary cardholder that his or her card was being used.
In these instances, the cardholder demands his or her money back, not knowing that the purchase was legitimate. But even though the consumer did not have malicious intent, the merchant is still hurt by the incident.
"It starts out very innocent," said Monica Eaton, co-founder of Chargebacks911, a dispute management firm that works with merchants on friendly fraud cases, according to CBS News. "But it actually damages: It creates cost for the credit card company, it can damage the cardholder or consumer's credit, it creates unnecessary cost for the merchant, and it increases prices the consumer ends up paying for at the end of the day."
What merchants can do
Credit unions can provide a great deal of information to their business members to help them prevent friendly fraud. PaymentsSource explained that an address verification system can help deter friendly fraudsters. This system verifies that the billing address the customer provides is the same one on file with the card issuer. For card-not-present friendly fraud, such as those that occur online, having a traceable shipping method can also help.
Other protections for online merchants include having signed delivery documents, email confirmations and CVV2 verifications. However, if your business members are primarily brick-and-mortar shops, many of these are of little use to them. For these, it is essential that they have an upgraded POS terminal that accepts EMV cards. This is the best way to protect against friendly fraud.