Reports suggest the company encouraged developers to make it easier for children to spend their parents’ money on in-app game purchases. A lot of the attention is focused on how Facebook left their users vulnerable to abuse. But there are multiple sides to this story. The real issue is being encouraged on many fronts – and unless we define all parties’ who are responsible to change it, this will continue and erode ecommerce and brands.
At the crux of this issue, is a consumer-merchant-bank-regulation problem.
How friendly fraud affects the market
The practice called “friendly fraud” occurs when a cardholder makes a seemingly-legitimate purchase, but later files a chargeback (a forced payment reversal) to undo the purchase. When a customer files a chargeback, the merchant loses the revenue from the transaction, any goods or services fulfilled, and is forced to pay a fee per filing (regardless of who’s at fault).
Friendly fraud is rampant in digital goods purchases where transactions occur in-app or through a game console. What we see with this situation is cardholders storing their payment information for future use. Children have access to this via their account, and over time, make purchases without their parent’s knowledge. Then, once the parents discover those purchases on their statement, they file chargebacks to recover the money (innocently, not knowing what consequence a chargeback carries for the merchant).
Chargebacks cost businesses over USD 31 billion in direct losses in 2017 (for Visa alone), though some experts estimate annual chargebacks surpass USD 80 billion, with friendly fraud representing somewhere between 60-80% of those disputes. But it doesn’t mean cardholders are solely to blame for friendly fraud.
It’s true that some friendly fraud is deliberate. Intentional chargeback abuse by cardholders – a practice called “cyber shoplifting”– allows customers to take advantage of a merchant and get something for free by simply claiming they didn’t authorize the purchase or pretending they never received the goods or services. While this does happen, there is a percentage of friendly fraud that is unintentional.
Most often, friendly fraud is a direct result of poor consumer education, and a lack of consistency in payments policy.
Inconsistency breeds liability
At Chargebacks911, we’ve noted a lack of online transparency hurting our retail clients for years now. It affects consumers and big brands alike, as the need to stay competitive with evolving consumer demands requires businesses to push the envelope. Coupled with a lack of consistently applied regulations in the payment space, Retailers are prone to make risky decisions - like reducing security checks to increase authorizations and reduce declines. For many retailers, the risk of declining a valid transaction and losing a potential customer, outweighs the potential aftermath of increased chargebacks (especially when we’re talking about friendly fraud).
Combined with the shortcomings, of regulatory standards in the payments industry, the result is a dangerous environment for everyone. Brand value erodes and drops in value, and businesses are forced to increase prices to offset the increased cost of fraud and chargeback management. In turn, consumers are the ones who eventually fit the billas prices edge up and policies tighten to cope.
We’re trapped in a cycle. Consumers want instant gratification, no additional clicks, and immediate results. Whichever business can deliver that level of service wins, and the drive to compete is forcing evolution. When we consider that, maybe Facebook isn’t the only party who should take a share of responsibility.
Standards and practices are the solution
If a merchant uses trickery to disguise charges, that’s another claim altogether. A chargeback would obviously be warranted, and the merchant would (and should) be penalized. However, consumers have the responsibility to protect their accounts with parental controls and regular oversight. To not use these protection mechanisms, then file a chargeback to overturn a transaction after a child makes a purchase, is a form of friendly fraud. It’s important to understand that the actual definition of friendly fraud implies the merchant is the victim; not the consumer. This is an important reality that is often lost in translation. Case in point: the responsibility lies on the cardholder, not the merchant.
If there are no solid, easy-to-interpret standards for behavior and compliance, what kind of message are we sending to businesses, consumers, and their banks?
This situation speaks to a broader need for the payments industry. Liability spreads throughout the entire payments ecosystem. In response, we need to emphasize responsibility for everyone involved: merchants, cardholders, banks, and even governments.
Standards of compliance with online security protocols and due diligence are weak. However, the problem is especially acute in the US.
We need clearly-defined standards in the industry. We need to establish which tools and protocols should be in place, and how they should be deployed. Take chargebacks, for example; chargebacks are subject to a litigation-based process. However, there are no universal standards banks can apply to review and judge cases. So, how can we ensure everyone gets a fair shake?
Visa and Mastercard definitely play a role here. Both card schemes recently overhauled their chargeback procedures, but neither established universally-applicable standards for dispute resolution. While some of these updates represented progress, nothing is really going to change until we implement more clear, tangible guidelines for business practices, as well as fraud and chargeback management.
Until we adopt sensible standards for security protocols and practices, and re-educate cardholders of their responsibility in this exchange, the tidal force of the market will keep producing more situations like we’re seeing unfold with Facebook, and others.About Monica Eaton-Cardone
Monica Eaton-Cardone is an international entrepreneur, speaker, author and industry thought leader. She has extensive experience developing agile technologies and products, optimizing e-commerce profitability, analyzing risk relativity and creating payment processing solutions. Eaton-Cardone was instrumental in co-founding several successful companies, including Chargebacks911, eConsumerServices and Global Risk Technologies.
About The Chargeback Company
The Chargeback Company, known as Chargebacks911 outside Europe, provides comprehensive and highly scalable solutions for chargeback compliance, handling services, and fraud strategy management. The company helps decrease the negative impact of chargebacks, thereby increasing revenue retention to help ensure sustainable growth for every member of the payment channel
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