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A thief looking to scam a credit lender goes on an online shopping spree, ordering thousands of dollars worth of goods. When the bill comes, he calls the credit card company and claims they are fraudulent charges.
In good faith, the lender issues a “chargeback,” or credit, to the customer’s card, and the thief gets away with cyber shoplifting.
This crime is costing retailers up to $16 billion per year, and it’s making online shopping more expensive for consumers, as retailers pass along the costs associated with cyber shoplifting, said Monica Eaton-Cardone, co-founder and chief operating officer of Chargebacks911.
“Banks aim to keep their cardholders happy and typically assume ‘the customer is always correct.’ … [This] often leads to automatic chargeback refunds without further investigation or analysis,” she said, noting that cyber shoplifting falls under the larger category of “friendly fraud.”
“Chargebacks give consumers a loophole where they can call their bank or the merchant for an online transaction where they claim they didn’t receive the product or they could say, ‘I don’t recognize the transaction’,” Eaton-Cardone added.
According to Lexis-Nexis’s 2014 True Cost of Fraud study, merchants benefited from a $30 billion increase in online spending this year. However, the study revealed that “large eCommerce and mCommerce merchants are still among the hardest-hit by rising fraud losses and associated costs. Unfortunately, fraud loss as a percent of revenue nearly doubled for this segment since last year.”
“An executive at a large national issuer and acquirer says that only 50 percent of transactions disputed are actually recovered,” says the report.
A CRIME ON THE RISE
While the multitude of data breaches have been plaguing the brick and mortar retail industry over the last few years, online merchants are being faced with the repercussions of cyber shoplifting. In fact, unjustified chargebacks of this type are growing at 41 percent per year, said Eaton-Cardone.
“Unfortunately, as these data breaches are advertised it educates the public, and it instigates the temptation to claim you were a victim [of identity theft] when you really weren’t,” she said.
“We saw a huge spike with Target cardholders’ chargebacks that actually were probably not participants in the Target breach,” she added.
Online merchants end up shouldering the financial burden.
“Not only do they lose the transaction value, merchandise, shipping costs, and chargeback fees of $10 to $40 per transaction, but high chargeback rates can jeopardize their ability to process credit cards and lead to substantial fines and penalties,” said Eaton-Cardone.
COSTS PASSED ONTO THE CONSUMER
As a result of cyber shoplifting, online retailers have begun to increase their price of doing business to make up for the increasing monetary losses.
“You no longer have the luxury of retuning merchandise like we used to. Online retailers are charging restocking fees, and a lot of stores are already imposing strict policies,” said Eaton-Cardone.
“Ultimately, online stores will start to increase their prices to make up for their increasing costs,” she added.
Leading online retailers are taking action against cyber shoplifting. For example,Amazon.com has released a policy whereby if the online retailer finds that a customer files a fraudulent chargeback, “they will charge the customer an additional fee and will go after the customer for filing the chargeback,” Eaton-Cardone said.
While some consumers are unaware of the full cost and ramifications of their chargebacks, others intentionally engage in friendly fraud. One study found that among cardholders who deliberately file unwarranted chargebacks, more than 20 percent said that it was “OK” or that it “didn’t bother them very much,” said Eaton-Cardone.
In fact, Chargebacks911 has found that cardholders who obtain a fraudulent chargeback and get away with it are likely to become repeat offenders, with 50 percent filing another chargeback within 60 days — thereby perpetuating the cycle of friendly fraud.
“And as a consumer if you’re caught committing chargeback fraud you could be sent to a collection agency, your credit can get damaged and you could get black listed and blocked (by retailers) from being able to purchase online products,” she said.
GUIDANCE FOR RETAILERS
Some credit card companies have tried to help merchants prevent cyber shoplifting. For example, Mastercard created interactive education modules to provide merchants with resources to optimize their business operations, said Seth Eisen, a spokesman for Mastercard.
“The Merchant’s Guide to Chargebacks outlines 10 helpful ways merchants can minimize the risk of chargebacks, while providing tips on navigating the process,” he said.