The Expert Podcast

If you're a retailer or sell any type of product either online or in person, you have certainly been a victim of friendly fraud. Friendly fraud is a form of theft from a company where a customer purchases something from you as a merchant and then later claims a chargeback or dispute on their credit card saying either they didn't get the right thing, they never received it, or another type of claim that is not proper. An article came out today, calling it "first-party delivery fraud." This is where the cardholder claims they never received it, but they really did. Sometimes cardholders claim that their credit card was misused, it wasn't used properly, or they didn’t receive the right product or service. This is very common, and it's also a lot more prevalent today than it used to be. According to a survey, one-third of Americans commit the crime—that's a huge number. As a merchant, it can really cost you a lot because it costs you more than just the loss of that sale or that product. We're going to talk about how to prevent it, and more importantly, how to respond when it happens in a way that might nip it in the bud.

There's a lot of people that do this who don’t realize that it can be discovered. If you can catch the cardholder in the act, that dispute or chargeback can be reversed—either by the cardholder intentionally withdrawing it (that's the ideal scenario) or you winning that chargeback. The key is you don’t want that chargeback to stand because the losses are more than just the money. You pay a chargeback fee on top of the money. So if you sell something for $700 and they charge it back, you lost that $700 plus the chargeback fee, which can be $70, $80, $90, or even $100. In addition, chargebacks accumulate to your account to where, if you get more than 1%, you might lose your merchant account. First, they’ll probably freeze all your purchases, so all your sales for that day get held by the bank, and you don’t get that money. Maybe they'll hold 30 days' worth as a reserve and eventually close down your account. So you don’t want these chargebacks to stand.

So, what can you do about it? Well, first, let's take a look at how big of a deal this is with consumers. The stats say 35% of 1,000 surveyed Americans say they're doing it. Think of it as "buying and lying," which is one way the process is referred to—falsely claiming delivery to get a refund, or choosing not to pay off a credit card bill. Gen Z consumers are most likely to commit it, with 52% of them saying they would commit it if they thought there were no negative consequences. That’s the key—no negative consequences. We’re going to look at what those consequences are.

How do you handle this? Well, it's a three-step process. First, you want to send that cardholder a notice. Don't just go by what the bank does—you want to send them a notice. You want to create an investigative report with all the facts because most of the criminals who do this think that no one's ever going to check up on them. It's easy to check up and prove what they're saying is wrong. You also want to have certain terms and conditions on your website that address this, and you want to do a little bit of research about what happened with that customer.

What do we do, and what can you do? First, you want to send that customer a notice. What we do is send them an investigative notice from our investigative agency, which is a licensed private investigator. So they get an official notice from a licensed investigator with an investigator license number telling them that we are performing a full investigation on this case. We've been hired to investigate a credit card dispute reported to whatever your company is. We’ve been notified that your account may have been used to make a report to a financial transaction to a transfer of funds from the merchant. What that says is, a lot of times people who do chargebacks don’t realize that it costs a merchant. They just think it costs the bank. They figure, "Well, the banks lose the money, no big deal." They don’t think it has anything to do with the merchant. They think that Visa is giving them their money back. They don’t know it’s coming out of your pocket.

So, we first tell them that your account may have been used to make a report to a financial institution to induce a transfer of funds from the merchant. So, we're telling them that they've taken money from the merchant. Sometimes that's enough. Sometimes they like you as a merchant and just feel like, "Well, I’ll just… somebody’s going to write it off at the bank." That’s not how it works. The content of that report indicates some of the information may be inaccurate. We’re telling them that they made a report to take money from the merchant based on false information—that is fraud. To make a false claim to get money is fraud, and most places it’s a crime. As of today's date, it appears that this dispute is still active, and you are in possession of the funds transferred from the merchant. Again, we’re reminding them that they got money from the merchant.

Then, we get into the meat and potatoes of it. The reported credit card was used in an attempt to obtain a white surfboard (or whatever the product is). It’s referenced in the article, and we put a picture of it. It could be a stock photo or an actual photo from your inventory, but it’s important to have that picture. And here’s why: we’re going to look at what the advantage is of having that photo. Because it’s going to catch their eye when they see this letter. Okay, whatever it is, but then when they see their surfboard or whatever they bought from you, it could be a bicycle, could be a service, whatever it is. We’re going to put a photo there of exactly what they have—same color, same information, everything. Why is that? Because what we’re going to tell them is we are compiling evidence to submit to the financial institution for adjudication of their dispute. Please reply to this email with any supporting documentation you have on this.

If the financial institution reports the dispute is closed, this investigation will be terminated. We’re also going to put a map of their house, showing UPS tracking that shows the documents were delivered to the client’s address. First, we’ve requested the IP address from the order to see if it matches. Second of all, we’re going to send notices out to everybody on these streets. And let’s say their houses are right here—we’re going to name these streets: Main Street, Oak Street, whatever it is. Because sometimes, and we’re going to assume that what they’re saying is correct, if they say their credit card was stolen and somebody used their number, we’re going to say, "Look, most of the time when criminals steal a credit card, they steal other credit cards from the mailboxes." So maybe your neighbors had their credit card stolen too. We’re going to ask them. We’re going to send them the same letter that says, "Be on the lookout for the surfboard." Or if they say, "I never got the delivery," we’re going to tell them, "Look, UPS tracking shows the item was delivered here." Many times, porch pirates steal stuff from other porches in the same area, so we’re going to ask your neighbors if they’ve seen this surfboard.

What’s that going to do? If your client is actually a victim of theft, they’re going to look at it as you’re looking out for them. You’re trying to help them. You’re doing an investigation. Good on you. They’re not going to have any bad feeling towards you. However, if they’re a scammer and they're a criminal, and they know you’re sending out a letter to their neighbors to be on the lookout for the surfboard, that might not go well. Right? It’s a way to try to show them that there are negative consequences, or there could be. In addition, we’re going to tell them that we’re going to run a trace route. Trace route is, we take their IP address that they used to place the order (because you have the trace route when you took that order online or that credit card). You have their IP address, and we’re going to backtrace it and find out where it backtraces to—what internet provider, Charter, AT&T, what have you—and we’re going to tell them that we’re going to make an investigation into that merchant account to see whose account shows up on Charter. That might rattle their cage a little bit.

In addition, what we’re going to do is look on Craigslist and Facebook and social media to see if this item is being offered for sale or used near you. Now, here’s number three that they might be concerned about: you have a licensed private investigator who’s going to look on social media to see if this surfboard or whatever product is being offered for sale or being used in your area. Again, we’re looking out for you as a consumer to see if we can get your item back if it really was stolen from you. Here you are as a company taking the effort to try to find their item. In reality, if it is a friendly fraud or scam by that actual buyer, they’re going to get a little bit rattled. They’re going to say, "Wait a minute. I posted a picture of me surfing on that on social media. I posted it for sale on Craigslist." What have you? That’s going to be another way to show that you’re looking into it. We’re also going to have a tip line in case anyone gets curious. They’ll say, "Hey, you’re going to do an investigation into my house, and I don't want you doing that, so here’s what happened."

In addition, if you find that they’re giving you a fake name or fake information, you’re going to let them know that you’re going to report them to the credit bureau for falsifying documents or providing false information. And then, what happens if you win? We are going to show that you’re now going to submit this to the credit agency for arbitration. The bank’s going to look at it and say, "Wait a minute. We found out that these people were dishonest in the first place. There’s your evidence." If you have that backup, if you can actually prove it, the odds are pretty good that you're going to win.