Since the growth of the internet, online shopping is no longer a luxury—it’s an expected commodity. This means that, as the online marketplace has grown, so has the opportunity for fraud.
Consumers have wizened up to internet scams but they are still reluctant to make online purchases from websites that feel untrustworthy. They are also more inclined to report a charge as fraud to their credit providers or banks that may not actually be an illegal transaction.
In fact, most instances of “fraud” are not criminal in nature. That’s not to say that data breeches and identity theft are not very real concerns. Here at ClickBank, we understand that those kinds of threats are a pressing consumer for consumers. However, we also know how motivated banks and credit providers are to maintain their relationship with their clients.
A lot of people don’t know that when they request a refund through their bank or credit provider and are issued a “chargeback” it is often coded as a fraud by the bank. These transactions have a big impact on ClickBank’s fraud rate.
What is a “fraud rate?”
“Fraud rate” is a percentage rate that is determined by credit lenders and is calculated by dividing the dollar amount of all the transactions reported as fraud by the total dollar amount of all transactions. This percentage is calculated every month. ClickBank is required to maintain a fraud rate under .9%. Therefore, we require that our vendors maintain a fraud rate of less than 1% as well.
Maintaining a low fraud rate is important for vendors and for ClickBank. Fraudulent transactions cost vendors revenue and fees. They also affect the credibility ClickBank has with credit card companies and as a leader in internet commerce.
Friendly Fraud vs. Criminal Fraud
Every time a transaction is categorized as fraud by a bank or credit lender, the money amount associated with that transaction is tallied and them divided by the total dollar amount of all the transactions. This calculation formula makes tracking fraud consistent.
However, not all transactions that are classified as fraud are what we commonly consider fraud to be. Many of them are what are known as “friendly fraud.”
Friendly fraud is when a transaction that happened under nonthreatening or illegal circumstances is notated as fraud. Instances of friendly fraud include:
- Shared Account Issues
Sometimes, when an account is shared with a partner or family members, unauthorized purchases can be made. Or, sometimes, the primary cardholder forgets about a transaction. In either of these cases it is not uncommon for the primary cardholder to report the purchase as fraud.
- Delivery Issues
Sometimes, if an order is not shipped or tracked, or it gets lost in the mail, a customer will go to the bank or credit lender to request a refund rather than to the vendor.
- Emotional Motivators
If a customer feels that they have been scammed or duped, and don’t receive adequate customer support, they may request a refund from the bank.
If a customer believes that are getting one thing, and receive another, they may feel that they were mislead or tricked. They may not feel comfortable contacting the vendor and will go directly to the bank to receive a refund instead.
If a product is recurring and a vendor does not make that clear to a customer, this can result in customer frustration. If the customer is not provided with adequate support, a transaction may be classified as fraud.
- Customer Service Issues
Many instances that result in in chargebacks or transactions being classified as fraudulent start as customer service issues. Making sure that customers feel heard and seen is paramount to keeping a fraud rate under 1%.
The best way to minimize friendly fraud is to maintain an open channel of communication that customers can access when they feel uncomfortable or disappointed with a sale.
What is a “chargeback rate?”
A “chargeback rate” is different from a “fraud rate” in that the transaction in question is not classified as fraud by the bank or credit lender. In addition to keeping their fraud rate under 1%, ClickBank requires users to also keep their chargeback rate under 1%.
If it occurs that a vendor’s fraud rate is high, but their chargeback rate is low, this may be an indication of friendly fraud issues rather than criminal fraud.
If a vendor’s chargeback rate is high, and their fraud rate is high, this generally means that criminal fraud is occurring or that there is a serious issue with the product.
What is the highest contributor the ClickBank’s fraud rate?
When it comes to ClickBank’s fraud rate, the greatest contributors are friendly fraud related issues. That’s why we believe that the best way to keep fraud rates low is to make sure there is a clear channel of communication between ClickBank users and their customers so that issues can be resolved rather than escalated.
What about compliance issues?
In addition to friendly fraud, the fraud rate is also influenced by compliance issues. Compliance issues occur when a vendor does not follow ClickBank regulations or FTC and FDA regulations. This can happen knowingly, or unknowingly. Whatever the case, ClickBank takes regulation violations very seriously.
Here’s a list of some common compliance issues to avoid:
It is not only poor business practice when a vendor overpromises results, it is against regulations. Instances of overpromising can result in chargebacks and fraudulent transactions.
- Recurring Billing Transparency
Vendors must be transparent about recurring billing. If the subscription information is not made clear or is hard to find, it is likely that the vendor will experience a high fraud rate.
- Confusing Upsell Flows
It is a compliance violation if a vendor’s upsell flow links are confusing, and the decline option is not readily available.
What happens when a vendor’s fraud rate increases beyond 1.0%?
If a vendor’s fraud rate goes over the 1.0% threshold, ClickBank may reach out and investigate what type of fraud is occurring. If we suspect that it is criminal fraud, we will take steps to block bad customers or affiliates. If it appears that the fraud is friendly, we will get in touch with some suggestions and changes that will help bring your fraud rate down.