The e-commerce industry has proliferated over the years since we are all buying online all the time- whether you’re in Israel or abroad, an artisan or major brand. Despite the growth in e-commerce, the phenomenon of chargebacks, which costs merchants quite a bit of money, has not gotten enough attention, nor has friendly fraud developed.
So, what are chargebacks? Essentially, if you order something online and want to return it, you must follow the guidelines stated on the website. Sometimes, people cancel their purchase by asking their credit card company to return the money and ask for a chargeback. They do so for various reasons, some legitimate and others not so honest.
A legitimate reason for requesting a chargeback could be because you didn't receive the goods you ordered, or you received something radically different from what was advertised. Another legitimate reason to ask for a chargeback is if your card was stolen and someone else made a purchase with it.
However, sometimes when people request chargebacks they aren't doing so in good faith. For example, a customer might ask for a chargeback because the return date has expired. Another illegitimate source of chargebacks is due to "buyer’s remorse” – when a shopper regrets making a purchase but is too embarrassed or lazy to return the item. Either way, the shoppers get their money back, but the card company and the retailer are put through a long and painful process. The card company is initially addressed with the chargeback so it is their responsibility to deal with the customer’s return, while the retailer loses both the money paid for the goods and the goods themselves, gets fined for chargebacks, and must prove that the customer received the goods to recover any of their money.
The raw numbers of how much money is wasted due to chargebacks are staggering. In 2022, 66 billion transactions will produce 33 million chargebacks disputes in the U.S. alone, according to Mercator Advisory Group estimates. Consumers spent $871.03 billion online with U.S. merchants in 2021, up 14.2% from the following year with $762.68 billion in 2020, according to Digital Commerce 360. Meanwhile, chargebacks are roughly 0.5% of all retail transactions. That means, U.S. B2C online retailers alone lost roughly $4.36 billion directly to chargebacks in 2021, not including fines and additional indirect costs like operational expenses. That number could be very distorted, as it is estimated that merchants lose $2.40 for every $1 charged back, which means that U.S. B2C online retailers could have actually lost out on $10 billion in 2021.
The term friendly fraud was coined over a decade ago by e-commerce industry players in the U.S. to describe the growing phenomenon based on the military term ‘friendly fire’. As the name suggests, based on a customer’s behaviour before and during checkout, those who commit this type of fraud, appear to be good guys whereas hackers and other fraudsters who steal credit cards and try to use them on e-commerce sites can usually be sorted out by their distinct behavioural patterns that are unusual for regular shoppers.
Friendly fraud shoppers chargeback for items they regret buying or they are trying to get the item for free (so-called liar buyers). They also induce a very costly headache. For example, in the past two years, according to a study by a fraud solution vendor, 38% of fashion retailers saw a friendly fraud increase. Furthermore, many merchants are reporting double-digit increases in friendly fraud chargeback rates over the past year. However, since friendly fraud is often mislabeled as criminal fraud, the actual figure may be much higher.
The ugly sisters of e-commerce is a growing phenomenon especially felt by retailers in the U.S., but it is spreading worldwide and relevant to every retailer, big or small, selling in their own country or all over the world. As with most trends that start in the U.S., then reach their way to Europe, it is a matter of time until the phenomenon gets to Israel.
Indeed, e-commerce has improved our way of life and drastically changed the way merchants operate. We must also be aware of its ugly sisters and the costs it has for retailers. It could be a death blow for small retailers and cost a pretty penny for big retailers.
Written by Ofir Tahor, co-founder and CEO of JUSTT