Payment merchants seek solutions to chargeback and friendly fraud

By Puja Sharma

Sift, the leader in Digital Trust & Safety released its Q4 2022 Digital Trust & Safety Index, which found that chargeback dispute rates have risen over 35% since Q1 2022, as everyday consumers increasingly seek to claw back money from businesses.

The report, based on data from Sift’s global network of over 34,000 sites and apps, as well as a survey of over 1,000 consumers, highlights how chargebacks and “friendly” fraud have increased as budgets are constrained amid rising inflation, geopolitical turmoil, and a global economic slump. Friendly fraud (also known as first-party fraud) occurs when a consumer makes a purchase with their credit card, chooses to dispute the purchase with their financial institution, and requests a chargeback—despite receiving the purchased goods or services.

As reported by IBS Intelligence, Friendly fraud occurs when these claims are falsified, and they can cost businesses a significant portion of their revenue. Interestingly, The Consumer Abuse Index states that non-payment fraud has increased five-fold during the COVID-19 pandemic. Worryingly, the index shows just how commonplace abuse is among shoppers. 36% of UK shoppers have claimed that a legitimate charge on their account was fraudulent. Meanwhile, 30 percent have falsely claimed that an item hadn’t arrived. Before the pandemic, only 14 percent had said the same – less than half of its current levels.

SCA is out of scope for this type of fraud because most orders will look legitimate when they are made as a genuine consumer isn’t hiding behind a false identity with friendly fraud.

Merchants must consider other fraud solutions to avoid friendly fraud. The prevention platforms that utilize historic shopping data can identify consumers that are more likely to commit friendly fraud, prevent them from doing it again, and remove liabilities of chargebacks for merchants.

Fraud Claims and Costs Rise While Economy Dips

According to the report, two-thirds of consumers have filed disputes, and of that subset, nearly 1 in 4 (23%) admitted to participating in friendly fraud. In addition to the rising rate of consumer fraud disputes, the average disputed dollar amount is also higher than last year—increasing 16% to $192.53. This jump signals a more widespread negative impact on businesses’ bottom lines during the remainder of the 2022 holiday shopping season and beyond.

As the dollar amounts of disputes and rates of chargebacks rise, businesses are left picking up the costs. Not all industries, however, are fighting the same battle. Verticals such as digital goods and services, retail, and fintech face the highest average number of disputes, and the top three most disputed items are clothing (21%), subscription goods (19%), and electronics (18%).

“As the economy cools down from historic highs, consumers are looking to save money however they can, luring many to resort to first-party fraud,” said Sift Trust and Safety Architect Brittany Allen. “These chargebacks quickly tally up against merchants who are already under stress from the sagging economy. Merchants can mitigate chargebacks by employing a Digital Trust & Safety strategy, which protects against fraud and abuse, streamlines the dispute process, and eliminates friction for legitimate customers.”

The Hidden Costs of Chargebacks

Chargebacks not only impact merchant budgets but their reputations in the long term as well. Of the consumers surveyed by Sift who have filed a dispute with a merchant, more than 83% reported they would be less willing to buy something from that brand in the future. What’s more, 50% say they would never shop with a brand again if the merchant failed to resolve their dispute within 30 days, highlighting how crucial it is to take these high risks of brand abandonment seriously.

While card networks offer some protections, like Visa’s imminent CE3.0 update, they are only part of the solution. Merchants must protect themselves for the post-holiday chargeback season now. With a Digital Trust & Safety approach, businesses can scale their fraud prevention strategies at every touchpoint to reduce abuse, streamline chargeback management, and maximize growth.