The Top 3 Friendly Fraud Takeaways for 2021

Posted By: Stephanie Underwood MAC Monitor ,

Contributor:  Craig McClure- Director, Relationship Management at Chargebacks911 & Fi911

Chargebacks are not a new problem for those operating in the payments space. Over the last decade, merchants—and the financial institutions that support them—have contended with a rising tide in chargebacks from legitimate and illegitimate sources alike.

The newly released 2021 Chargeback Field Report, published by Chargebacks911, offers a first-hand look at the current chargeback situation as reported directly by merchants. In the report, we see numerous trends in the chargeback space, few of them being positive.

Some of these trends are the direct result of market disruption and changing consumer habits in response to the Covid-19 pandemic. In fact, among merchants who attributed a change in chargebacks to the pandemic, the average response indicated a 25 percent increase in issuances. More often, though, we can identify a longer-term, underlying pattern at play.

Many chargeback trends detailed in the report were already evident even before the pandemic struck. What’s different now is that there is more awareness of measures available to combat chargebacks, and more opportunities for merchants—and other entities in the payments space—to improve procedures and eliminate risk. However, this will take a significant combined effort for the benefit of all.

#1. Criminal Activity and Chargeback Abuse both on the Rise in 2021

It’s no surprise to learn that chargebacks were up across the board compared to previous years. Merchants who reported an increase in disputes between 2018 and 2021 claimed that criminal fraud incidents were up 21 percent. In addition, friendly fraud chargebacks were up 23 percent during the same period.

Criminals have been shifting their focus to the card-not-present space for years. This pattern accelerated with the surge in ecommerce activity resulting from Covid-19 shutdowns.

What’s most notable here is that, traditionally, it’s been difficult for merchants to distinguish friendly fraud from legitimate chargeback sources like criminal fraud. Chargeback reason codes are unreliable indicators because friendly fraud relies on hiding behind false reason codes.

The average merchant lacks the time and resources to engage in the kind of in-depth data analysis necessary to pinpoint friendly fraud. This suggests that friendly fraud is likely a bigger problem than many merchants realize.

#2. Not Enough is Being Done to Address Friendly Fraud 

94 percent of respondents reported that friendly fraud was a concern for their business. This is especially true in the US, where merchants were almost twice as likely to identify friendly fraud as the source of their chargebacks as compared to European merchants.

Chargeback abuse is now widely recognized as a problem. However, merchants and financial institutions are still not taking the steps necessary to address the problem. Merchants who identified friendly fraud as “a major concern,” as opposed to “somewhat a concern,” were more likely to seek third-party assistance with chargebacks. That said, only 29 percent of respondents said they were taking any steps to mitigate friendly fraud.

The costs of friendly fraud impact merchants directly, but they reverberate throughout the payment chain. Financial institutions get hit with unnecessary processing costs and card scheme fees, as well as losses if merchants’ reserves are unable to cover outstanding chargeback liabilities. Given the rate at which friendly fraud continues to climb, this is not an issue that anyone can afford to ignore.

#3. Representment is a Major Opportunity

The report finds that the average merchant responded to 43 percent of chargebacks. Merchants won an average of 32 percent of those disputes, with larger merchants based on average annual revenue reporting above average success with representment. This makes sense; merchants with more resources at their disposal will be better equipped to invest in this complex, time-consuming process.

That said, a significant portion of chargebacks (11 percent) were escalated to a second-cycle dispute. Plus, as mentioned above, the typical merchant has a limited capability to identify friendly fraud. This means many chargebacks which could be overturned through representment will go unchallenged.

The report notes that the average net win rate among merchants—the merchant’s rate of successful representment as a share of total chargebacks issued—was only 12 percent. In effect, merchants will recover revenue from only one in every eight chargebacks filed.

If merchants and financial institutions can find a way to optimize this process, they may stand to recover billions of dollars currently lost to friendly fraud.

Tremendous Opportunities on the Table for Merchants’ Acquirers

Chargeback abuse is clearly a major threat for merchants and financial institutions, but it also presents an opportunity. With more resources directed to representment and other methods for chargeback management, businesses can recoup substantial amounts of revenue currently being siphoned off by misuse of the chargeback process.

These are just a few of the insights to be found in the 2021 Chargeback Field Report. Click here to view the full study.