Cyber Shoplifting is Affecting Both Retailers and Consumers

There is a phenomenon sweeping through the ecommerce environment, and it’s negatively impacting everyone involved.

Friendly fraud and illegitimate chargebacks have negative ramifications for consumers, merchants, financial institutions and card networks.

The Good and the Bad

First, the good news. Between 2012 and 2014, the number of ecommerce sales increased by 40 million. By 2018, there will be about 1 trillion additional transactions

Now, the bad news. Instances of cyber shoplifting or friendly fraud are costing retailers as much as $11.8 billion per year. And according to Visa, 40% of consumers who engage in friendly fraud will do so again within the next 90 days.

So what is cyber shoplifting, and how is it affecting retailers and consumers?

Cyber Shoplifting Explained

Let’s say that a consumer makes a purchase from an online retailer. The customer waits for weeks, but the item never arrives. The shopper tries calling and emailing the seller repeatedly, but to no avail. It seems the customer has been cheated. Fortunately, there is a recourse. The customer can contact the bank and demand a chargeback, meaning that the bank will forcibly withdraw the money from the merchant’s account and return it to the customer.

Chargebacks were originally envisioned as a form of consumer protection, as highlighted in the above situation. Unfortunately though, chargebacks have morphed into a tool of fraudsters in recent years.

Take our hypothetical situation and change just a few variables. Let’s say the consumer did receive the item, but later experienced buyer’s remorse. In a desperate attempt to get a refund, the consumer files an illegitimate chargeback with a claim that the merchandise was never delivered.

Consequences for Merchants

In situations of friendly fraud, consumers gets their money back, but the merchant loses the merchandise and is forced to pay an additional chargeback fee.

Repeated chargebacks can lead to serious, long-term consequences. The merchant pays increased fines and could easily lose the ability to process credit card transactions.

If merchants choose to fight back against these friendly fraud chargebacks, they’ll be forced to participate in a time-consuming and expensive dispute process.

Consequences for Consumers

The practice holds consequences for consumers as well. On the surface, it seems this consumer protection mechanism only threatens merchants, but chargebacks can negatively impact consumers too.

As businesses lose more revenue to fraud, they are forced to raise their prices in order to compensate. Smaller businesses may not be able to compete, and bigger businesses will have higher prices across the board, meaning less variety and higher prices for consumers.

Plus, consumers who are identified as friendly fraudsters could be forced to pay the applicable chargeback fee. And if the cardholder cries wolf too often, the bank could close the account.

These consequences could lead to negative association with the merchant involved, impacting the business’s future sales and reputation.

How Serious is Friendly Fraud?

This form of cyber shoplifting is growing rapidly. Industry expert Monica Eaton-Cardone recently reported that cyber shoplifting via friendly fraud is increasing at a rate of 41% per year.

Related Article: The Growing Problem of Fraud

According to the annual LexisNexis report, the overall amount of revenue lost to fraud nearly doubled in 2015, jumping from 0.68% to 1.32%. Friendly fraud accounted for a sizeable portion of that sudden, dramatic increase.

Some industry figures have suggested that the now infamous Target security breach back in 2013 has had a major impact on the explosion of friendly fraud. With the widespread publicity surrounding the Target breach, consumers’ awareness of using chargebacks as a tool for fraud likely expanded.

Many of the more than $1 billion in related fees, for which Target was responsible after the breach, are assumed to be cases of friendly fraud. Shoppers falsely alleged that charges were made to their account fraudulently in order to receive a chargeback.

What Can Businesses Do to Prevent Cyber Shoplifting?

This trend of cyber shoplifting is only expected to increase, meaning that retailers will need to take advantage of additional fraud-fighting services in order to stay ahead of the criminals. Additional measures to fight against fraudulent activity is going to be especially important as mobile wallets become increasingly popular.

There are multiple different approaches a business might take in order to fight this relatively new and still developing form of fraud.

• Offer round-the-clock customer service.
• Use accurate and easy-to-identify billing descriptors.
• Properly disclose the terms of service and return policy.
• Offer refunds promptly.
• Manually review transactions determined to be “high risk” by fraud filters or orders that contain fraud red flags.

As an online merchant, there is no way to totally prevent fraud. However, by educating yourself and following certain practices it is very possible to mitigate your risk.

Author: Jessica Adams is a business and leadership expert. She writes for her own blog, The Leadership Notebook, and contributes to Parenting Squad. You can find her on Twitter.