By Kacy Zurkus, Card Not Present Staff
Reports that Facebook leveraged “friendly fraud”—a practice e-commerce merchants are usually hurt by—in potentially deceptive ways for revenue gain surfaced in January, which has led to two U.S. senators calling on the Federal Trade Commission (FTC) to investigate. The case has brought friendly fraud mainstream attention and exposed a calculation some merchants are able to make when they accept transactions they know are likely to be disputed, if noticed by cardholders.
According to the Center for Investigative Reporting, unsealed court documents claimed the social networking pioneer allowed children to rack up, “in some cases hundreds or even thousands of dollars, and then often refused to give the money back.” In fact, Sens. Ed Markey (D-Mass.) and Richard Blumenthal (D-Conn.) sent Facebook a letter, “citing evidence the company had knowingly manipulated children into spending their parents' money while playing games on Facebook,” according to Broadcasting Cable.
Facebook is not the first internet giant to face scrutiny over the issue. Amazon was cited by the FTC in 2016 after it received many complaints from consumers about surprise in-app charges incurred by children. The regulator said the company’s disclosures about the possibility of in-app charges within otherwise “free” apps were not sufficient to inform consumers about the charges.
“We are pleased the federal judge found Amazon liable for unfairly billing consumers for unauthorized in-app purchases by children,” said FTC Chairwoman Edith Ramirez, at the time.
“Settlement agreements with the FTC required those companies to modify their billing practices to ensure they obtained express, informed consent from consumers for any in-app purchases, and required them to offer refunds of up to $70 million,” according to a letter urging the FTC to investigate Facebook’s practices signed by 17 organizations advocating for the rights of children and consumers including Common Sense Media and the Center for Digital Democracy.
Reducing Fraud vs. Increasing Revenue
According to Reveal, part of the Center for Investigative reporting, Facebook’s own reports reflect the reality that many minors don’t fully understand that they are spending real money, especially when their parents’ credit card is linked to their Facebook account.
Sens. Markey and Blumenthal said in a joint statement, “Facebook’s claim that it had in place robust policies to ‘make clear’ to users that they were spending real money is completely inconsistent with what users report.”
Beyond the notion that it’s wrong to take advantage of kids that have access to their parents’ linked credit cards to make online purchases, however, is the fact that some influential companies like Facebook are manipulating a process that other merchants, because they lack its size and structure, cannot.
“Facebook passes on all the charges, so it sees 100 percent of sales but takes 0 percent of the risk. It’s not their money. It’s the gaming company’s risk,” said Karisse Hendrick, founder of Chargelytics Consulting.
While a gaming company may well have its own ‘negative’ list—which enables it to block transactions it knows are likely to be disputed—Facebook doesn’t use the merchant’s list, so the charges are not blocked because Facebook was the platform through which the charge was processed.
Despite any effort the merchant made to reduce fraud, the charges enabled through Facebook resulted in a loss for the gaming businesses but an increase in revenue for Facebook, Hendrick explained.
The Not-So-Friendly Side of Friendly Fraud
In the larger picture of friendly fraud, merchants understand the consumer is not always—or even usually—the victim.
“Consumers are more interested in removing friction from the checkout process than we are in trying to make sure we have a secure transaction,” said Monica Eaton-Cardone, COO and co-founder of Chargebacks911. “Visa and Mastercard have advertised how easy it is to file a disputes, so consumers realize how easy it is for the charge to go away.”
Consumers have no liability if they don’t recognize a charge, which can encourage them to be less vigilant in monitoring their transactions and canceling subscriptions, or in the case of the Facebook charges, giving their children access to their credit cards.
According to Eaton-Cardone, 82 percent of Google’s chargebacks are friendly fraud. “Google is the victim, but as a society, we see it as bad customer service.”
If a merchant has a chargeback rate of more than one percent, it is supposed to be put into a chargeback monitoring program and potentially face fines if the problem is not controlled. Because of its power in the market, though, “Facebook is in a position where it can say, ‘You’re supposed to be protecting me, but you are costing me money in friendly fraud,” said Eaton-Cardone. Thus the giants become the exceptions to the rule.
All the while, banks are losing money and merchants are paying chargeback fees. The cardholder has to go through the hassle of reporting the fraudulent charges, and in some cases the merchants end up raising prices.
Where Do We Go From Here?
While it’s fair for merchants to ask what can be done to prevent chargebacks, it’s also fair to recognize that the card holder also has a responsibility. Even if parents tell their kids that they have to ask before making a purchase, kids don’t always know when they are being charged.
The Campaign for a Commercial-Free Childhood is actively trying to establish new standards that would prevent the practice of encouraging children to make in-app purchases. On the organization’s website, beneath an image of a character in tears after a player declined an in-app purchase, site states: “When apps and games are labeled for children, parents should be able to trust that they’re truly safe for kids. But unfortunately, they can’t. New research shows that the most popular apps in the Family section of the Google Play Store are rife with problems, like pressuring kids into making purchases.”
In reality, though, both sides are at fault, and there is likely a lot parents could have done to prevent these exorbitant charges. While it’s likely that few cardholders have actually read through the fine print of their cardholder agreements, Visa and Mastercard do state that the cardholder is responsible for the card in their possession, yet the cardholder isn’t being held responsible when their children’s accidental purchases are refunded.
One issue is establishing uniformity in policy among the many different moving parts involved in the online payment process. According to Hendrick, starting over with better processes in place is always an option.
“In 2016, Google issued a blanket refund. Microsoft did something similar, then they invested in a lot of technology that helped them reduce this type of friendly fraud. There is a responsibility of companies to make sure that overall you are targeting the right cards. It’s about being responsible in knowing who your customers are. “
Rather than seeing the issue of friendly fraud as cat and mouse game where no one wants to accept responsibility, merchants might be better served to see the Facebook news as an opportunity to look at why chargebacks are coming in.