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 formerchants.

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

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

How does this affect you? Chargebacks can make goods and services more expensive, as theassociated 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 socommon 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 arefund from your bank," said Monica Eaton, co-founder of a dispute-mitigation firm calledChargebacks911 that helps merchants avoid friendly fraud and recover revenue lost to suchtransactions.

Chargebacks are a sensitive subject for retailers, Katzaed said. "You feel like you've betrayed yourcustomer. 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'sUpper West side, but like most retailers today much of its business is done through the store'swebsite.

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

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

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

"We shouldn't be guilty first," said Raoul Didisheim, another retailer who runs the Mariana Antinoriboutique 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 thechargeback and then send us all the paperwork."

The steps for investigating a chargeback are tedious and labor-intensive, so most merchants don'tbother with them, especially for lower-cost items. This makes friendly fraud easier to pull off, even ifsome 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 cardcompany, it can damage the cardholder or consumer's credit, it creates unnecessary cost for themerchant, 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 asone of the top threats to e-commerce, after "triangulation" schemes and phishing/pharming/whalingscams.

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

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

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

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

"With identity theft, you know who the criminal is," she said. "With friendly fraud it's difficult toisolate 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."

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