Unfriendly fraud

Executive Summary
Company. Chargebacks911 Industry. Retail, financial Key. There are ways for business owners to fight back on misused consumer protections.

In 2010, Monica Eaton-Cardone simply wanted to run an online retail business.

She had everything in place: the website, the product and even agreements with credit card companies like Visa and MasterCard to accept payment.

But what she didn't know about would change everything. That knowledge led her to build a company that in three years would generate more than $8 million in revenues.

It's all centered on one concept: chargebacks.

“I didn't know what it was,” Eaton-Cardone says. “I certainly didn't know banks could keep your money, and charge fees on top of it. That was a completely new experience.”

The firm, Clearwater-based Chargebacks911, started as a side consulting business for Eaton-Cardone, whose online retail store was bombarded with bank fees caused by customers disputing charges. Her online business sold celebrity-endorsed cosmetics, health and fitness products and books.

Instead of reaching out to ask her for a refund, these customers would tell credit card companies they never bought the product. The bank would refund those customers by taking money out of Eaton-Cardone's account, and hit her company with fees on top of it. That's a chargeback.

“I called everyone I could about this, and couldn't seem to get any good advice on what to do,” Eaton-Cardone says. “Many people told me that if I just refunded my customers, those transactions won't turn into chargebacks. Yet none of these customers called us, and we never had a chance to find out what they weren't satisfied with.”

Stay safe
What Eaton-Cardone did find out, however, is that she was not alone. Chargebacks are so common, they cost online retailers more than $11.8 billion a year, according to an estimate from Visa in 2012.

That led Eaton-Cardone to build a business around getting online retailers' money back.

Chargebacks911 works on behalf of retailers to dispute improper chargebacks and get credit card companies to return the money to merchants from those transactions.
Chargebacks911 then retains a portion of that amount for its services.

For example, an online retailer would forward a chargeback to Chargebacks911, which will investigate the claim, and then dispute it. When Chargebacks911 is successful, it is able to get the payment for merchandise put back in the retailer's account, although the retailer loses the fees the credit card company charged (which can be between $15 to $100 per transaction).

Chargebacks are a problem because customers don't physically hand credit cards to these online retailers and sign receipts, so banks typically give these customers the benefit of the doubt when those same customers later dispute a charge. Some customers really didn't make the purchase, but many more conduct what is known as “friendly fraud.” That's when it's easier to dispute a charge and get an immediate credit for something after buyer's remorse than it is to reach out to a merchant to get a refund.

This concept plagues online retailers now, but chargebacks themselves date back to former President Lyndon B. Johnson, who signed the Truth in Lending Act in 1968. That allowed customers to contest credit card charges, protecting them from fraud on the merchant side.

To ensure payment, merchants started to collect as much information as possible from customers — adding imprinting, and later swiping — to erase any doubt those customers initiated the charge.

That has protected bricks and mortar retailers from friendly fraud. But the difference between “card present” and “card not present” has not been so kind to online retailers.

“These merchants are guilty before proven innocent,” Eaton-Cardone says. “What we do here, in a nutshell, is help create balance in the industry.”

Even higher-tech ways of making a payment, like using Apple's iPhone to complete a purchase in places like McDonald's and Winn-Dixie, have increased security for physical retailers. But that's done little for online counterparts.

In Apple Pay, the shopper uses his thumbprint on the iPhone to complete the transaction. Apple Pay creates a “token” that replaces usual credit card data in a point-of-service terminal, which can provide an extra level of protection from data breaches.

“Even with those transactions, merchants are protected because the banks consider the card to be present, even if it's not physically there,” says Damien Hugoo, product manager for Easy Solutions, a Doral-based fraud protection company. “When the card is present, problems then become a liability with the issuing bank, not the merchants, because it's just like you swiped the card.”

For online merchants to get that same level of protection, they would practically have to provide a questionnaire with every transaction, Hugoo says.
ScarCe competition

Chargebacks911, which Eaton-Cardone runs with her husband, Gary Cardone, has grown quickly since it was founded. The firm made the Inc. 5,000 list of fast-growth business in 2014, when it grew annual revenues 572%, from $1.2 million to $8.1 million. Eaton-Cardone even sold her original online retail business to focus on Chargebacks911.

“So many business owners don't even realize they can dispute these chargebacks,” Eaton-Cardone says. “I didn't even know I could contact the customers who did these chargebacks. I thought it was illegal.”

But it's not. And Eaton-Cardone learned a lot from those customers, including the fact many didn't realize how much money it actually costs businesses when they commit friendly fraud. What originally was considered a cost of doing business has become so cumbersome, it's practically putting many online retailers out of business before those stores can even get off the ground.

Chargebacks911 uses a cost-per-acquisition business model, where it charges clients based on the amount of money recovered. By disputing the chargebacks, a business also can protect its reputation, which is important for keeping those contracts with the credit card companies in the first place.

However, while payments lost in chargebacks can be recovered, the fees banks levied in the first place for those chargebacks cannot. Eaton-Cardone has added a second layer to her company that helps companies manage sales transactions, which limits the chargebacks in the first place.

Competition for this type of consulting service is scarce, and government officials still seem at a loss on how to combat chargebacks legislatively. That means Eaton-Cardone could be busy for quite a while dealing with such a growing issue.

“The nice thing about a merchant is that they are entrepreneurs who want to grow their business more than anything in the world,” she says. “Penalizing them with chargebacks just doesn't make sense.”

Business Protection
In 2012, Visa alone addressed more than $765 million in payment disputes from its customers -- many resulting in chargebacks to unsuspecting online merchants.

Chargebacks911, a Clearwater company that works with merchants to recover money lost through errant or even fraudulent chargebacks, offers some advice to companies trying to reduce the number of chargebacks. Tips include:

Answer the phone in three rings: A dissatisfied customer will typically hang up once she hears hold music, and opt to dispute the charge instead.

Provide order fulfillment information: Clearly state order-processing timeframes, and send email confirmations and order summaries within one business day of the original order.

Identify suspicious transactions: Merchants should be on the lookout for red flags like rushed or random orders, shipping addresses that differ from billing addresses, or customers who seem reluctant to give personal information, like ZIP codes or street names.