While 2022 started with optimism for a recovering economy, 2023 has started on a more bleak note. With rampant inflation and economists fretting about the potential for a full-fledged recession, a gloomy outlook doesn’t feel all that unreasonable — especially with recent mass layoffs across multiple industries.
A majority of consumers said they were excited to splurge as last year drew to a close –– but combined with lingering consumer anxiety, a surge in festive shopping followed by economic trepidation will also bring a heightened threat of something all stores rightly fear: chargeback fraud.
Post-holiday credit card bills are becoming due. Electronics warranties are expiring. One- month memberships bought in the spirit of New Year’s resolutions are about to auto-renew. Maybe someone is giving up on their resolution to go to the gym. Maybe someone affected by layoffs can no longer afford their Christmas splurge bought through a buy-now-pay-later program. Either way, consumers have more reasons now to sidestep the retailer and go directly to their bank to have their transaction reversed.
We call this sort of behavior “friendly fraud” — but given that it’s costing businesses over a hundred billion dollars a year in additional expenses and lost revenues, there’s really nothing friendly about it. As we head further into this potentially turmoil-filled new year, it’s never been more important for retailers to have an effective strategy for dealing with this threat to their hard-earned revenues.
The seasonal rush
Payment fraud can occur at any time of year, but for merchants, the weeks before and after the holidays are particularly fraught. A sudden rush of orders can lead to fulfillment problems as stores battle to get items to buyers as quickly as possible. Shipments get mislaid, consignments are mismatched, and quality control drops. The result? An uptick in chargeback claims.
Some of these claims will be authentic — customers who didn’t receive their purchases within a reasonable timeframe, and weren’t properly supported by the merchant involved. Others, though, will bear the hallmarks of friendly fraud: buyers immediately lodging chargeback claims on spurious grounds, or without giving the seller a chance to rectify the issue themselves.
Fulfillment pitfalls aren’t the only issue with holiday shopping, however. Black Friday, Cyber Monday, Prime Day, and other pre-season sales are popping up earlier and earlier in the year, leading some people to genuinely forget about their early purchases. That, of course, leads to a rise in disputes as unrecognized transactions are contested further down the line.
Then there is the seasonal tsunami of buyer’s remorse: orders placed in good faith, only to be challenged when customers realize they’re short on funds or missed out on an even better bargain elsewhere after the returns window has passed.
This particular problem is likely to be larger in 2023 with rising inflation hitting household budgets hard. The drop in disposable income has also led to an increase in the use of buy-now-pay-later schemes — an innovation that can compound merchants’ chargeback woes when cash-strapped customers fall behind on payments.
Steps to take
From a financial perspective, friendly fraud is an enormous problem; for every dollar a seller pays to settle a chargeback claim, they lose around $2.40 thanks to additional hidden expenses. Each payment dispute also contributes to a merchant’s chargeback-to-transaction ratio, potentially leading to fines, higher transaction costs, or even the rescinding of their card processing rights.
To avoid that, retailers should start by ensuring their refund policies and product descriptions are crystal clear, and that their customer service team is easily accessible. This will help customers understand precisely what they’re buying, how long they have to initiate a return, and how to get support from the merchant if issues arise.
Secondly, stores should review their return and refund rules ahead of any anticipated shopping surge. In this respect, it’s important to remember that chargebacks can cost a company more than twice the value of a refund — not to mention the harm done to customer loyalty — so it’s wise to implement as generous a policy as possible.
Thirdly, stores should go the extra mile to verify cardholder identities at checkout. One of the most common friendly fraud ploys is to pretend a payment card has been stolen in order to secure a chargeback, so by documenting a customer’s identity, merchants boost their chance of defeating a later dispute.
Finally, retailers should make a conscious effort to bolster their teams with additional resources through the start of the new year. More staff at the fulfillment end will result in less mistakes being made, and added customer service support will mean fewer disgruntled shoppers feeling compelled to take matters into their own hands.
An intelligent solution
Seasonal staffing isn’t easy at the best of times, however — and right now, thanks to the tight job market and mounting labor costs, it’s especially tough for stores to bring in much needed personnel. This employee shortfall is also being felt by retailers’ in-house payment fraud mitigation teams, who are having to tackle a growing workload with fewer staff.
With that in mind, many merchants are exploring tech-enabled answers to the chargeback conundrum, leveraging advances in artificial intelligence to enhance their friendly fraud defenses. Automated software can now rapidly gather relevant transaction information from across a retailer’s payment system, crafting comprehensive, data-rich evidence reports that heighten the likelihood of a wrongful claim being overturned.
The best mitigation platforms marry this machine learning with human insight to provide a “hands-off” solution for busy retailers. An intelligent system, for instance, will examine the specifics of a seller’s T&C and checkout procedure to create customized dispute templates, and automatically gather the data needed to win cases without pulling resources away from seasonal priorities such as customer service, advertising, and logistics.
Taking the fight to friendly fraudsters
Retailers should be focused on offering customers as rewarding and stress-free a shopping experience as possible. Too often, however, merchants’ minds are preoccupied with the upsurge in friendly fraud — an unwelcome trend that threatens to dampen everyone’s new year’s spirits.
Fortunately, chargebacks needn’t be the nightmare after Christmas. With an intelligent, tech-enabled approach, sellers can take the fight to friendly fraudsters, defeating the tide of invalid disputes and keeping their hard-earned revenues safe.
Roenen Ben-Ami, co-founder and Chief Risk Officer of Justt.ai, is an expert in the field of payments and chargeback mitigation. Previously, Roenen led the Chargeback and Merchant Risk teams at the payments service provider Simplex, which successfully recovered millions of dollars a year. He also served for nine years in an elite military intelligence unit in the Israel Defense Forces, attaining the rank of captain and spearheading the creation of an innovative operations department focused on change leadership, human resource development, and risk management.