This Fraud May be “Friendly,” But Costs Are High

This holiday season, the phrase "the customer is always right" holds a new kind of menace for merchants.

"No matter where you turn, they're always right, so you can't do anything about the problem of chargebacks because, yes, 'the customer is always right,'" David Katzaed, manager of clothes retailer Big Drop NYC told CBS News.

Chargebacks occur when banks force a refund for a disputed credit card purchase. They were created as a form of protection for consumers and to streamline returns when customers filed a complaint about a wrongful transaction. But with the growth of e-commerce, chargebacks have become a headache for merchants, with shoppers increasingly taking advantage of regulations aimed at protecting consumers.

How does this affect you? Chargebacks can make goods and services more expensive, as the associated costs of dealing with them are passed along to consumers.

According to the latest data, 86 percent of chargebacks are fraudulent. The practice has become so common that it has earned its own phrase in the e-commerce world: "friendly fraud."

"Friendly fraud happens when you as a consumer make a purchase, where nobody saw you in person -- over the phone or online -- and you received the merchandise or the service, and then you got a refund from your bank," said Monica Eaton, co-founder of a dispute-mitigation firm called Chargebacks911® that helps merchants avoid friendly fraud and recover revenue lost to such transactions.

Chargebacks are a sensitive subject for retailers, Katzaed said. "You feel like you've betrayed your customer. But you want to serve them in the best way, so you investigate this package, that package -- 'Was it UPS' you know?' And then a lot of times you realize -- it's the creativity of the thieves."

Katzaed's business is a client of Chargebacks911®. The physical storefront is located on Manhattan's Upper West side, but like most retailers today much of its business is done through the store's website.

"Friendly fraud follows surges of increased spending," Eaton said. "Online shopping is growing, and so is friendly fraud. It's up 41 percent since 2011." She added that contacting banks was designed as a last resort.

Consumers "believe it's a faster resolution, and they don't actually have an understanding that contacting their bank to get a refund is not the same as contacting the merchant for a refund, and there's actually a whole series of consequences."

One immediate consequence is that banks block the payment and reverse the charge to the merchant. Additionally, merchants are hit with a non-reversible fee set by their bank of anywhere from $5 to $35 per item.

"We shouldn't be guilty first," said Raoul Didisheim, another retailer who runs the Mariana Antinori boutique on Manhattan's Upper East Side. "We should be able to show that the customer was here, that they charged something, that we have the proof of their purchase, before they take the chargeback and then send us all the paperwork."

The steps for investigating a chargeback are tedious and labor-intensive, so most merchants don't bother with them, especially for lower-cost items. This makes friendly fraud easier to pull off, even if some consumers are unaware that they're doing anything wrong.

"It starts out very innocent," Eaton said. "But it actually damages: It creates cost for the credit card company, it can damage the cardholder or consumer's credit, it creates unnecessary cost for the merchant, and it increases prices the consumer ends up paying for at the end of the day."

Visa (V) estimates that friendly fraud translates to losses of $11.8 billion, and the FBI identified it as one of the top threats to e-commerce, after "triangulation" schemes and phishing/pharming/whaling scams.

By opting for chargebacks, consumers could unwittingly force merchants to raise prices, as they are forced to factor in the inevitable cost of friendly fraud. This is the main long-term consequence of friendly fraud.

"They [banks] should ask you several questions, 'Did you contact the merchant, did you receive the merchandise?'" Eaton said. "The problem is that with the growth of e-commerce and so many consumers buying online, there isn't all the time to do the due diligence."

Eaton explained that all three players involved in chargebacks -- banks, merchants and consumers -- should be more transparent about how they interact in an e-commerce setting.

The best tool for countering friendly fraud? Customer service, Eaton said, noting that if merchants focused as much on providing 24/7 customer service as round-the-clock shopping, the problem of friendly fraud would greatly diminish.

"With identity theft, you know who the criminal is," she said. "With friendly fraud it's difficult to isolate because these are crimes committed by consumers who may not have a malicious intent."

"It really is the type of fraud where everybody is affected in a negative way."