Chargeback Fails to Protect Against Friendly Fraud

Initially chargebacks were aimed at protecting customers from malicious merchants. But nowadays this measure seems to backfire. A chargeback occurs when bank returns money to the customer, removing it from merchant’s account.

Chargebacks pose an obstacle for merchants, routinely spawning fraud attempts, when customers try to gain money from the company by filing chargebacks.

Friendly, or chargeback fraud happens when a customer files a chargeback in bank instead of demanding the refund directly from the merchant. Such chargebacks may be genuine, if the customer did not receive the goods, or they do not match the description. However, the same claims are often made by fraudsters, and it is hard to tell the difference between real and fraudulent chargebacks.

What Is Friendly Fraud?

There are situations when customers file chargebacks by mistake, forgetting something or being unaware of purchases made by their family members. However, sometimes customers may be driven by a desire to steal from the merchant.

Chargebacks appeared as a result of trust to customers, who could be easily fooled by merchants who managed to convince them to buy forged or unexisting products or services. Later fraudsters realized that they can manipulate banks into chargebacks, claiming that they did not get their goods, or their card was used by other person. Upon succeeding, they got money and kept goods for themselves.

Outdated Legal Fraud Regulations

Chargeback was introduced in the early days of e-commerce, when transactions were conducted in traditional physical shops, and people carried their cards around in purses and wallets. Nowadays financial information is stored in online accounts, which offers even more possibilities for scammers.

The Truth in Lending Act, the official chargeback regulation, was created in 1960’s. The present-day shopping has changed, and this act simply fails to prevent scams.

The Root of the Fraud Problem: Outdated Payments System

Not only legal regulations are outdated. Banks and payments system also represent a problem. Theoretically, banks should thoroughly investigate each claim, but in reality this rarely happens, as chargebacks flood the banks, leaving the latter no resources to handle them properly.

Lack of resources forces banks to adopt simple verification procedures, thus letting customers to feel free to file a chargeback.

Any solutions for chargeback problem?

Both merchants and customers need protection. Some companies such as PayPal and Stripe tried to make their payment systems safer for everyone. Stripe even launched a chargeback protection service in June 2019, allowing customers to get their payments and merchants to stabilize cash flow.

Still, challenging the chargeback may be tough for a merchant, as validation of the original transaction is needed, and there are no measures merchants can take to prevent malicious customers from repeating fraudulent behavior. When financial information is disclosed, scammers can easily hack into the database in order to get it.

The solution to the problem does exist. With cryptocurrency and underlying blockchain technology financial information is secure, as it is stored in blockchain forever. Decentralized nature of the technology also makes hacking and tampering with the information almost impossible, which prevents identity theft. The ability to store information securely can solve the problem of merchants and customers for years.

However, there is a catch — merchants and customers have to unite their efforts in order to develop mutual trust in a fragmented environment.