Chargebacks and Friendly Fraud Soar as Food Delivery and Pick Up Surge

Chargebacks and Friendly Fraud Soar as Food Delivery and Pick Up Surge

April 23, 2020

The retail and hospitality sector have been hit hard by stay-at-home orders put in place to control the spread of the novel coronavirus. Eating out and vacations have ground to a halt and some analysts predict traditional brick-and-mortar locations for retailers may not survive the economic downturn.

One bright spot, however, is food pickup and delivery. Forced to stay home, consumers have turned to buying online and picking up food curbside, or to restaurant delivery services like DoorDash and Postmates to get meals brought to their door. A 2019 eMarketer study found 38 million people in the United States used food delivery apps at the time. The same research predicted that the number of users will rise to 44 million in 2020. But, with so many now turning to food apps, that number will probably be even higher this year.

E-commerce fraud prevention firm Kount has been tracking the changes in e-commerce models and consumer demand caused by the pandemic and finds quick service restaurants that offer mobile-order ahead and other ways to order food online are showing significant growth year-over-year in digital channels.

“This industry has seen some impact from business reactions to government mandates, however it appears to be picking back up,” said Rich Stuppy, chief customer experience officer with Kount.

Unfortunately, along with more transaction comes more chargebacks and friendly fraud. Forter’s 2019 Fraud Attack Index report finds a 79 percent increase in fraud in the food and beverage industry in 2018. And, according to data from Chargebacks911, merchants in the food and beverage vertical reported almost no chargeback activity in a study conducted from 2013. But, as online payments, delivery and pick-up curbside trended higher, that changed.  An updated report from 2018 finds 28 percent of food and beverage respondents had a chargeback rate between 0.5 and one percent of transactions. One in ten had a chargeback rate above one percent. Again, with a growing trend of food pickup and delivery, those numbers are likely higher now.

A problem that is tough to chew on

Friendly fraud already accounts for between 60 percent and 80 percent of merchant chargebacks, according to recent research. And, the food and beverage industry is more vulnerable because they are less equipped to recoup losses. Many restaurants and delivery services may not even realize for some time they are a victim of friendly fraud because the chargeback amount for a food order is typically low.

Sometimes, it can simply be a misunderstanding, said Stuppy.

“Friendly fraud doesn’t just occur when someone is looking to keep an item without paying for it—often friendly fraud is actually accidental,” he said “Maybe a consumer received their food delivery and it was cold, or late, or something else was wrong, and instead of getting refund from the restaurant, they initiated a chargeback.”

Stuppy also notes that, as many brick-and-mortar restaurants deal with digital transactions for the first time, they may not have a system prepared for refunds or disputes, which can also result in friendly fraud chargebacks.

“With more companies looking to models like mobile-order ahead and Buy Online, Pick Up in Store (BOPIS), there is an uptick in companies looking to both prevent fraud and to deliver smooth customer experiences,” said Stuppy. “Tackling fraud can be difficult because it’s hard to identify and distinguish between criminal fraud, friendly fraud, and legitimate disputes. Reducing criminal fraud is a necessary first step in order to isolate and address friendly fraud, since they are often classified under the same reason codes.”

What food merchants can do about chargebacks and fraud

Chargebacks911 notes in a blog post that some work is being done to prevent chargeback abuse. Changes like those made to Visa’s global dispute process, called Visa Claims Resolution, rolled out in 2018, and Mastercard’s change to their dispute resolution process were both a good start, but not enough.

“The problem is complex and multifaceted; it demands a multilayer solution implemented at the individual merchant level,” the blog post notes. “Leveraging tools like fraud scoring, Address Verification Service, CVV verification and geolocation—these are fundamental to any viable strategy. Understand, however, that they only address criminal fraud; that’s why you need to optimize the customer experience to prevent chargebacks due to merchant error, too.”

Stuppy notes combatting friendly fraud requires a specialized set of tools that are typically not included in traditional fraud detection solutions. But, the ability to quickly and accurately identify and segment fraud can help mitigate challenges. He also stresses the need to focus on the customer experience to best prevent fraud.

“It’s important that restaurants and merchants are prepared for fraud at not just the point of payment, but throughout the customer journey,” he said.

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Joan Goodchild

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