Family Fraud: A “No-Win” Situation for Cardholders & Merchants
Let’s say you’re an app maker in the gaming industry.
You sell built-in user experiences and programs for a more immersive platform. However, you’ve just been notified by mail of incoming disputes from customers. These individuals have been users for quite some time. However, they're all now claiming that people accessed their account to make unauthorized purchases.
Could it be fraud? Maybe. But, what if there’s another possibility? What if the buyer on the other end of the transaction isn’t a criminal…but isn’t necessarily an authorized user, either?
That’s the issue now facing thousands of digital goods merchants, as well as some of the world’s largest names in technology and retail. It’s a practice called “family fraud,” and both cardholders and merchants should take caution.
In this article, we’ll discuss what family fraud is and why it’s classified as fraud in the first place. We’ll explore how it affects merchants, and what you can do to fight it.
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- The Top 10 Tips for Chargeback Fraud Prevention in 2022
What is Family Fraud?
- Family Fraud
Family fraud is a type of eCommerce fraud that occurs when a family member of the account holder makes an unauthorized purchase, which the account holder later disputes.
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Here’s a quick example to help illustrate. Let’s say a child makes an in-app purchase through an online gaming system. The purchase gets charged to the parent’s credit card without their knowledge. The cardholder sees the charge on their statement, is unable to recognize it, and disputes the charge with their issuing bank.
Family fraud falls under the broader umbrella of friendly fraud. This is because the disputed purchase was technically legitimate, as it was made by a relative of the authorized user.
If a cardholder believes a transaction was unauthorized, they’re encouraged to reach out to the merchant first. If they can’t resolve the situation, the cardholder can contact the bank to initiate a chargeback. This is a valid use of the chargeback process.
In contrast, a child accessing an account without permission would be one of those occasions in which a little pre-planning and foresight could have entirely prevented the dispute. The cardholder may not be entitled to a dispute if they didn’t conduct due diligence to prevent this from happening.
Who’s Responsible for Family Fraud?
Family fraud seems pretty simple at first glance.
The cardholder should have to approve any purchases made using their account. The controls for the account are up to the cardholder to manage, and they incur responsibility for purchases made by accident. So, from the merchant’s perspective, the purchase should not be eligible for a chargeback. The cardholder should bear responsibility for family fraud.
It’s not quite that simple, though. The cardholder can argue that digital goods merchants who allow unilateral access to their products bear responsibility for incidental transactions. The cardholder could claim that the merchant’s verification standards weren’t strong enough to prevent unauthorized purchases.
Is it the merchant’s fault that the household didn’t have account controls set? Is it the cardholder’s fault that children are targeted for in-app purchases? Frankly, it might be a bit of both.
Whichever end of the debate you fall on, though, the fact is that merchants are often left on the hook for these charges. And, the amount they lose adds up.
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How Big of a Problem is Family Fraud?
In a word: huge.
Kids’ unauthorized purchases cost businesses in the eCommerce space billions every year. For example, in April 2017, Amazon agreed to refund consumers for roughly $70 million of unauthorized in-app purchases. However, the culprits weren’t criminals; the transactions were all made by children.
Kids with access to their parents’ devices or accounts make tens of millions of unauthorized in-app purchases every year. While most microtransactions are very small, some of these totals easily exceed $100 cumulatively before the parent is aware of the situation.
On average, these first-party fraud offenders initiate nine transactions before getting cut off. By that point, the damage is already done.
Criminals? Or just innocent kids? When it comes to chargebacks, the impact on your bottom line is the same.
This problem surged after Amazon agreed to drop their appeal of an earlier FTC complaint alleging that parents were not liable for their children’s unauthorized purchases. The FTC previously settled with Apple and Google on the same subject in 2014, demonstrating that this is not an issue exclusive to one company.
The base of these claims is that the companies’ platforms bear responsibility for the sales. The purchase was not fully-informed because family members made the transaction without needing the cardholder’s authorization.
Consider the timeline of the Amazon App Store’s authentication protocols. According to the FTC’s claims, Amazon was liable for these transactions because they didn’t apply strong enough verification standards. Their trouble is just one high-profile example of a very common problem.
Fighting Back Against Family Fraud
Digital goods merchants are under pressure to balance the need for user authentication with a reduction in transaction friction. Overly-strict authentication standards frustrate customers and lead to abandoned purchases. But, with more lax security comes the threat that unauthorized users might make purchases.
In this case, we advise merchants to do two things. First, take strong precautionary measures. Second, be prepared to fight back whenever appropriate. We’ll discuss the latter option first.
As with many other types of first-person fraud, you can fight family fraud through chargeback representment. We should note, however, that the representment process is an arduous and time-consuming one. In order to make a good show of your rebuttal, here are a few steps to help keep the process simple but effective:
Examine the Claim
The bank will supply a reason code to explain the claim made by the cardholder. You should compare the cardholder’s claim to the documentation on file to decide if it’s valid.
Evidence is required to prove any counterclaim. Acceptable documentation can include transaction details, photographs, transcripts of conversations with the cardholder, and tracking and shipping information.
Draft a Rebuttal Letter
Relevant documentation must include a rebuttal letter, which explains the situation and makes a succinct, yet compelling argument for why the chargeback should be reversed.
Submit Your Documents
After reviewing all documentation, the final step is for the merchant to submit their claim to the bank. This must be done according to specific requirements (i.e. email, fax, physical mail, etc.).
How to Prevent Family Fraud: 5 Simple Steps
You should not technically be responsible for children’s unauthorized purchases. Like we mentioned before, though, banks often side with cardholders in these cases. Even if the sale was entirely legitimate on your end, you can be left holding the bill for the lost profits and chargeback fees due to these unauthorized transactions.
The family fraud problem is not going to go away. Therefore, it’s up to you to protect your revenue from the threat of family fraud chargebacks.
Here are five steps that can help you prevent family fraud:
Make Customer Service Readily Available
Providing consistent, round-the-clock customer service is always the first step toward preventing chargebacks.
Customer service should be accessible as many hours a day as possible via phone, email, and social media. If live 24/7 service is not possible in-house, merchants should provide some form of contingency service. The best solution could be to contract with a third-party answering service to handle overflow and off-hours calls.
Validate Customer Receipts
Major app stores like Apple and Amazon allow merchants to offer receipt validation with in-app purchases. This lets sellers using these platforms validate purchases made by users from the merchant’s server. This ensures customers receive the items they buy and that the user ID is valid, while also providing a clear record of the transaction.
Address Complaints and Offer Refunds When Suitable
With the Amazon App Store settlement, many parents claimed the company suggested refunds weren’t possible. However, we know that when dissatisfied customers are unable to secure refunds, they often take matters into their own hands and go directly to the bank for a chargeback.
Showing genuine concern for a customer’s situation can go very far toward ensuring positive interactions between merchants and customers. If customers request refunds after a family member makes an unauthorized purchase, it may be best to satisfy their demand. Although offering a refund isn’t ideal, it is still preferable to a family fraud chargeback.
Encourage Parental Controls
Many users are unaware that iOS, Android, and Kindle devices all offer restrictions on in-app purchases using the devices’ content control settings.
It’s a good idea to remind customers of this fact whenever possible. Add information to your site instructing customers how to disable or restrict in-app purchases. Some designers also incorporate prompts into their apps to remind users to set parental controls.
Enable Two-Step Authentication
You can enable two-party authentication to approve in-app purchases. While we realize customers generally don’t love a big hassle when they’re ready to make a purchase, parents who would otherwise dispute the unauthorized transaction would likely appreciate the added protection.
Two-factor authentication does add a slight bit of friction to the checkout process. However, it may also save you a ton in chargeback fees, thereby counterbalancing that friction.
Remember, nothing you do will ever fully prevent chargebacks. No matter how well prepared a business is, or how great their budget might be, chargebacks will continue to roll in and cost merchants time and money.
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Implementing best practices like these can help many businesses retain customers and lower their overall chargeback ratio. That is not to say, however, that every business experiences the same amount of chargebacks. Sometimes, the difference between lost and recovered revenue could lie in professional management.
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