Friendly Fraud Can Happen With Digital Wallets

Digital wallets, like Apple Pay and Google Pay have become more popular during the pandemic, allowing people to use contactless payment methods, which has been on the rise.

Unfortunately, there has also been an increase in friendly fraud with digital wallets as well. It’s a bit surprising, when you consider the in-person nature of the transaction, but it’s starting to happen more and more.

For example, QSRs never used to experience friendly fraud, but once they started participating in food delivery services, chargebacks began to rise with complaints that an order was incorrect or incomplete. Before then, people who had complaints would often just get their order fixed at the restaurant, and there was no need for a chargeback.

A recent article on reported that digital wallet fraud, especially friendly fraud, is on the rise. Fraud detection specialist Ravelin released a study of 1,000 merchants and found that merchants challenge 37% of chargebacks and do it successfully 56% of the time. But they also found that digital wallets are making things worse, bringing the success rate down to just 5% on chargeback disputes.

You can use a digital wallet to pay for a lot of different things.

There are a number of reasons why customers will issue a chargeback on a digital payment. For example, they didn’t recognize the payment, which is a problem no matter what someone uses to pay. Or they made the payment on the wrong card because they have several cards in their wallet. Or they didn’t intend to make the payment in the first place. These often result in chargebacks anyway, but they’re easily fixed as well.

But if the customer intended to commit friendly fraud all along, and claim that their purchase was incorrect when they call the bank, this is where the difficulty for merchants lies, because their own success rate is so low.

How Do Chargebacks Work with Apple Pay and Google Pay?

Chargebacks work like any other credit card company. A cardholder contacts their bank to dispute a charge on their credit card statement. And if the digital payment is made using a credit or debit card via a digital wallet, then the whole process is handled by the issuing bank.

But if the payment is made directly with Apple Pay/Google Pay using the money in those accounts, then the customer needs to file the chargeback with Apple and Google using their processes.

When this happens, you (the merchant) will be notified of the chargeback, and Apple or Google will review the documentation you provide. This is why it’s important to keep all transaction data.

If you aren’t able to successfully prove your case — which seems to happen 95% of the time — the chargeback will be upheld. If you are, then everything will be returned to you, including any chargeback fees.

Keep in mind that you have a deadline to respond, just like regular chargebacks. However, there does not seem to be any similar watchdog or merchant protection like CDRN by Verifi or Ethoca from Mastercard, so you have to handle the whole process yourself.

Apple also considers Apple Pay transactions to be Card Present (CP), while purchases made in an app or online are considered Card Not Present (CNP).

That means that transactions made with digital wallets are EMV-compliant purchases because they meet the 3DS2 requirements (something you Have, Know, or Are). That means— thanks to the EMV liability shift — that banks should bear the liability for any fraud that are purchased during card-present/EMV-compliant purchases. It also means it should be harder for people to commit friendly fraud. (It’s those CNP transactions that are a problem.)

The use of digital wallets is going to continue to grow, especially among Millennials and Generation Z. While it may be tempting to avoid accepting digital wallets or digital payments of any kind, the demand is there. And we may reach a time where it’s unavoidable.

If you accept digital wallets, just know that there will be instances of chargeback and that you need to have as many transaction details on hand as possible to dispute any charges, especially those made online. It’s hard for a person to justify that an in-store order was incomplete when they had to be there to complete the transaction. But those online orders will have the same difficulties as other CNP purchases. It’s just that the success rate of disputing those chargebacks are not in merchants’ favor.

If you want to learn more about reducing chargebacks and fighting friendly fraud, even with digital wallets, CB-ALERT can help. To learn more, please visit the CB -ALERT website.

Photo credit: Mohamed_Hasan (Pixabay, Creative Commons)

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