Disputed purchases and chargebacks are the price most merchants pay in a digital economy. But a rapid increase in the number of customers fraudulently disputing credit card charges is taking a bite out of businesses already hurting from high inflation and labor and supply shortages.
If merchants can't prove the purchases were legitimate, they're on the hook for the costs. Such "friendly fraud" can account for up to 75% of all chargebacks, said Verifi, a payment protection company.
Incidents of friendly fraud are up 20% to 30% in 2022 depending on the market, said Paul Fabara, Visa's chief risk officer, according to Axios.
Friendly fraud occurs when a customer accidentally or deliberately files a chargeback on a legitimate transaction instead of trying to first obtain a refund from the merchant.
Fabara said credit card disputes tend to increase when people's financial situations deteriorate.
"Netflix, alcohol, Uber charges, DoorDash charges — those are generally the ones that make up the majority of this category," Fabara told Axios.
Sift, a digital trust and safety company, said in its fourth-quarter report in December 2021 that 17% of consumers who filed chargeback disputes committed "friendly fraud" to get their money back. The report also revealed that about 10% did so on holiday purchases.
In its 2022 field report, financial consultant Chargebacks911 said approximately two-thirds of merchants reported a rise in friendly fraud over the past three years, with the average increase being 28%.
"This represents a startling increase in friendly fraud levels, particularly post-COVID," the report said.
The report added credit card companies are fighting rising chargeback rates with new tools for resolving customer disputes before they reach the chargeback stage, such as Visa's Rapid Dispute Resolution program.
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