“Friendly Fraud” Hurts Online Merchants – And You

Photo (cc) by Keith Williamson

You’ve heard of “friendly fire.” That’s when soldiers are accidentally fired upon by their comrades in the fog of war. But there’s nothing accidental or foggy about “friendly fraud,” a term that’s growing as fast as the scam it describes.

While it has many nuances, friendly fraud most often occurs when a credit-card holder buys a product online, receives it, then calls the online merchant, his bank, or his credit card company and declares …

  1. “It wasn’t me! Someone must’ve stolen my identity!”
  2. “I never got it! Must be lost in the mail!”
  3. “I didn’t order this item!”

More often than not, a merchant will grant a refund or the credit card company will issue a chargeback to the merchant, meaning the consumer has the merchandise but didn’t pay for it. You wouldn’t think it would be this easy to rip off a merchant, bank, or a credit card company, but it happens a lot. Online data services company LexisNexis recently released a 61-page report called the “2009 True Cost of Fraud Study” [PDF], and it concluded …

“On average, merchants in the digital-goods segment attribute one-third of their total fraud loss to friendly fraud, while online gaming merchants attribute 24 percent of their total fraud loss to this method.”

Friendly fraud is “doubly painful,” says Steve Cox, spokesman for the Better Business Bureau, “because not only do businesses lose the merchandise, but they also are out what they should have made on the sale.”

Part of these financial wounds are self-inflicted. When identity theft skyrocketed during the boom times, banks and credit card companies tried to keep their customers spending by bragging about how easy it would be for them to challenge purchases.

When the economy tanked, friendly fraud mushroomed, and it remains a stubborn problem.

“The reason it’s such a big issue now is that merchants are working with smaller staffs and lower budgets,” says Robert W. Botelle, an executive vice president for payment management company Litle and Co.

Another problem: It often costs more to fight the scam than it’s worth. These aren’t Bernie Madoff-sized transactions, after all. And now that the holidays here, experts only expect it to get worse.

“Friendly fraud has been on the rise for more than 3 years as we continue to struggle through the worst economic conditions in memory,” says Julie Fergerson, a vice president for fraud services company Ethoca. “So don’t expect it to improve this Christmas.”

Even if you don’t shed a tear for merchants, banks, or credit card companies, you might want to weep softly for yourself – because the business world is starting to crack down on friendly fraud, and honest shoppers may get caught in the crossfire with higher prices and reduced convenience.

The Better Business Bureau and other industry organizations are recommending merchants take steps like …

  1. Sign on the dotted line: The days of the UPS driver leaving your package on your doorstep when you aren’t home may be coming to an end. After all, if you sign for a package, it’s difficult to later claim that someone stole your signature.
  2. Must be a match: When you buy something online, you often have the option to have the products mailed to a different address than the one on your credit card. Some merchants are no longer allowing this, shipping only to the credit card billing address.
  3. Keep – and share – a “naughty” list: Many merchants already keep a list of customers who have disputed charges or otherwise presented a problem – a retail “blacklist” of people they refuse to deal with. And now some merchants have started sharing their lists.

These anti-fraud tactics not only create inconvenience for honest consumers, they might unfairly target the innocent in more lasting ways. For example, if you really don’t receive the merchandise or have a legitimate beef with an online merchant, you could still end up on the same blacklist as the crooks and be limited in your ability to shop online. Says the website Direct Response Forum: “Consumers appearing on such lists may have had only one dispute with one merchant. Yet the potential exists for such lists to brand those consumers as bad across a global band of merchants.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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