The next time you call your bank to dispute a fraudulent credit card charge, get ready for some extra hassle. And you might already have noticed that more shippers are requiring signatures for delivery of merchandise, a major headache for those who aren’t home during the daytime as the holiday shopping season arrives.
Both aggravations can be blamed, in part, on a rising number of consumers who are capitalizing on the prevalence of identity theft by using the "it wasn't me” technique to steal from banks and merchants. And merchants are fighting back against what banks call "friendly fraud."
A recent survey of merchants by online information purveyor Lexis Nexis found that 23 percent of fraud losses reported by large e-commerce sites come from friendly fraud, and one quarter of those sites said friendly fraud had increased. The study suggests that friendly fraud costs large Web sites as much as identity theft, though it’s still only about half as big a problem as retail’s largest nemesis, shoplifting.
The crime is easy to commit. Shoppers who want something for nothing simply call their bank after receiving whatever merchandise they ordered and pretend that an identity thief used their card. Then they ask that the purchases be removed from the account.
When a consumer claims fraud, a process known as a “chargeback” begins. Until recently, banks were eager to honor such requests, and often bragged that identity theft incidents were hassle-free for consumers. But an increase in friendly fraud has forced banks and merchants to take a closer look at fraud claims, in some cases asking consumers to sign affidavits and have them notarized, before issuing credits.
Even after providing such evidence, merchants and consumers are still subject to a quasi-adjudication process called "re-presentment," with the consumers' bank as the ultimate arbiter. If the bank sides with the merchants, the consumer is forced to pay -- something that's become much more common lately, says fraud expert Julie Fergerson, who works for Ethoca.com, a fraud-prevention company.
"The thing that is interesting is that banks are getting much tougher on the consumers and e-commerce merchants are starting to win some of the time, when the consumer says 'I didn’t do it,' said Fergerson, longtime executive at the Merchant Risk Council, an industry association designed to fight fraud. “It used to be an automatic, merchant loses every time. Now it is much harder for the consumer.”
That is evidenced by the "win" rates for merchants in the arbitrations, which are rising quickly, according to an annual Merchant Risk Council survey. It found that consumers lose the argument 44 percent of the time now, up from 30 percent three years ago.
Fighting fraud with Facebook
Part of the reason: Many merchants now outsource the re-presentment to a company named RMS - Receivable Management Services. Darrel Hewson, vice president of business development for RMS, said merchants have gotten wise about gathering more evidence in anticipation of fraud claims. One key piece of evidence: Those signed delivery slips from UPS or FedEx.
"We do look for delivery receipts and other validating data points," Hewson said. "We're always asking how to make sure we have data that can support the client's case."
You might be surprised how far the company will go: Hewson said there is now abundant friendly fraud in the travel industry, and one of his company's favorite evidence-gathering tools is Facebook.com.
"You might have Daryl take a trip and then initiate a chargeback and say, 'That wasn't me.' But then he posts on Facebook about what a great time he had. We look for that information, and if we find it we'll use it. … Criminals aren't always very smart."
Why is friendly fraud on the rise? Fergerson says the down economy is partly to blame. It’s also perhaps the easiest form of stealing – and a lot less risky than its blood brother, shoplifting. Hewson said the thieves almost never go to jail.
"Part of it is, it doesn't take long for consumers to educate themselves on it, and say, 'Gee that was easy,’” Hewson said.
The larger identity theft problem certainly bears some blame too, as friendly fraud is easily lost in a sea of other fraud. Until recently, merchants didn't put up much of a fight, focusing instead on the problem of traditional fraud.
“But merchants realize this is no longer just a cost of doing business, and they are getting resources focused on it,” Hewson said.
Banks lose when merchants win
You might think that a consumer could only get away with committing friendly fraud once or twice before his or her bank caught wind of what was going on, but that's not true, said Hewson. The number of parties involved in a chargeback, and their various economic incentives, mean banks often don't stop their own cardholders.
"The bank doesn't view that as their responsibility,” Hewson said. “The different parties here are not necessarily pulling the same oar."
When a chargeback occurs, it’s like a thread is pulled out of a garment. It begins when a consumer calls the credit card bank -- called the issuing bank -- and claims fraud. The issuing bank credits the consumer, then calls the merchant's bank -- the acquiring bank -- and says, "give me back my money while I investigate.” The acquiring bank, sends the money back, and then reaches into the merchant's account and takes back the money.
If the merchant objects, a re-presentment "case" occurs, and the cardholder’s bank --- the issuing bank -- decides who is telling the truth. If the consumer wins, the merchant is out the money. If the merchant wins, the consumer must pay. But if the consumer is a criminal and has vanished, the issuing bank is out the funds. So the bank has an enormous financial incentive to decide in favor of the consumer. That's why friendly fraud artists can get away with it for so long.
"You'd think the bank would say,'This is the fourth time this the year, maybe something is wrong here. But many times, from bank's perspective, it's less costly," to side with the consumer. "The bank is trying to mitigate their cost, and it's no skin off their nose."
Banks also sell convenience and reassurance to their account holders, and want to ensure positive customer interactions when fraud arises -- particularly in light of the negative publicity generated around the government bailout.
That attitude is changing, however, as banks are discovering that friendly fraud repeat offenders usually have other financial problems and are a high default risk, Fergerson said.
"If a consumer has a history of saying, 'Hey I didn't buy that,' chances are they are in financial trouble," she said.
Meanwhile, a little pushback can go a long way, Hewson said. Many would-be criminals "rethink" their chargebacks after their bank requests an affidavit or other evidence that fraud has occurred.
"They often will call in and say, 'Oh yes, I remember that charge now,'" he said.