Consumers are cheating businesses out of payments at increasing rates by fraudulently disputing credit card charges that they genuinely made.
Driving the news: Incidents of “friendly fraud” are up anywhere from 20% to 30% in 2022 depending on the market, Visa chief risk officer Paul Fabara tells Axios.
Why it matters: Businesses are already dealing with a slew of challenges as inflation, wage increases and labor shortages undermine the bottom line.
If they can’t prove that transactions are legitimate when a customer disputes them, they’ll be forced to cover the cost.
Details: “Friendly fraud” includes an array of situations in which a customer improperly disputes a charge on their credit card bill, including when they:
Forgot about a purchase or don’t recognize the name of the merchant on their bill.
Don’t realize that a friend or family member used their card to buy something.
Intentionally spend money with the intent of disputing the charge after the fact.
The big picture: It’s not entirely clear why credit card disputes are rising, particularly because they had been falling for a few years after the rollout of chip cards.
But the pandemic appears to have been a catalyst, as restaurant chargebacks have grown from 1 in 400 transactions to 1 in 100 since it began, according to financial consulting firm Chargebacks911.
Between the lines: Growing awareness of the fact that disputing a charge can be a way to escape financial responsibility for the payment may be a factor.
Another possibility is a turn in the economic tide: Credit card disputes tend to increase when people’s financial situations deteriorate, Fabara says.
Threat level: “Netflix, alcohol, Uber charges, DoorDash charges — those are generally the ones that make up the majority of this category,” Fabara says.
“It’s brutal,” Chicago restauranteur Louie Alexakis told Crain’s Chicago, saying his 5 Avli locations have experienced a 30% increase in disputes costing them thousands a month.
“The amount of chargebacks that we get and the time that is spent and the training that we’ve had to give our staff . . . that has gone up dramatically.”
Yes, but: Fabara says Visa is equipping merchants with the tools to fight back, which he believes is going to reduce the number of friendly fraud claims in the future.
Merchants currently win about 40% of the time they fight credit card chargebacks requested by customers, according to Equifax division Midigator.
“We’ve been working really, really, really hard … to make sure the name of the merchant on the record is [recognizable] and represents the business you’re in and the customer can recognize where the transaction is coming from,” Fabara says.
Meanwhile, Visa is also ensuring that restaurants follow its transaction protocols — such as ensuring that the card is valid and that the amount is correct — so that they can prove that the purchase was legitimate, Fabara says.