'Friendly Fraud' at the Root of Almost Half of Merchant Chargebacks, Study Finds

More and more shoppers are filing bogus card disputes that frequently leave merchants holding the bag on chargebacks, according to new data from technology and consulting firm Chargebacks911.

The survey of more than 200 online, multichannel and mobile commerce merchants found that 56% of respondents saw an increase over the last three years in “friendly fraud,” which occurs when customers file fraudulent disputes with their card issuers for various reasons, such as to get something for free or for convenience.

Now nearly half (46%) of merchants’ chargebacks came from friendly fraud. Only a third (33%) was from criminal fraud, the data said.

Many merchants don’t fight the chargebacks, and those that do often lose, according to the study.

“If the results of our survey are any indications, merchants are by and large aware of the chargeback problem; they’re less aware of any type of solution. A variety of tools exist for helping prevent chargebacks and challenge disputes, but to a large degree those tools are being ignored. This leads directly to wasted eff­orts and high chargeback rates, which in turn create a sense of futility about the entire subject,” the company said.

Some merchants have dedicated resources specifically to handling chargebacks, though their success seemed to vary.

Of the merchants that regularly disputed chargebacks, for example, over 80% did so using dedicated internal fraud teams. The others either outsourced to a third party or did both, according to Chargebacks911’s data.

“Respondents who reported using a third-party solution cited an overall win rate approximately 20% higher than those who disputed chargebacks using an in-house resource,” it noted.

“Certain elements are commonly known to increase chargeback risk, and over half of respondents report one or more of these liabilities. Approximately one-third were actually in a high-risk industry, while the rest simply employed high-risk factors such as subscription billing or free trial offers,” it also said. According to the data, 29% of respondents used subscription billing, 14% used affiliate marketing and 13% had free trial offers.

Other findings in the survey included:

• 45% of respondents accepted bank transfers as payments.
• 47% of respondents accepted payments from mobile wallets.
• 6% accepted cryptocurrency.
• 13% of respondents did not know their chargeback rates.
• 38% of respondents had chargeback rates below 0.1%.
• 14% of respondents had chargeback rates of more than 1%.
• 44% of respondents had fewer than 10 chargebacks per month.
• 22% of respondents had more than 150 chargebacks per month.
• 46% of respondents had chargebacks for services, 45% had chargebacks for physical goods, 45% had them for software and digital goods and 13% were for tickets.