Children & Digital Goods: A Recipe for Chargebacks
How the Most Unlikely Culprits May Cost You Digital Revenue
The introduction of mobile-enabled eCommerce opened substantial new opportunities for merchants and consumers alike. However, increased mobile access lead to a wave of unauthorized transactions pulled-off by some very unlikely offenders.
Kids’ Digital Purchases Are Costing Merchants
In April 2017, mega retailer Amazon agreed to refund customers roughly $70 million for unauthorized purchases made via their mobile app. The case stood out because these sales were not made by criminals or hackers, but by children.
The FTC ruled that millions of unauthorized transactions made by children without their parents’ permission were attributable to Amazon’s verification standards. As a result, the company was held responsible and ordered to refund customers for sales dating back as far as 2011. Apple and Google have been forced to make similar settlements, demonstrating that the problem is not limited to just one merchant.
How are so many kids making unauthorized in-app purchases? They often come in the form of microtransactions—a very popular model in gaming.
How Consumers Interact with Mobile Devices
For insight on the matter, we need to examine our behavior regarding mobile devices. The mobile usage stats below offer a bit of insight into the average mobile consumer and how they interact with their devices:
Top 5 Countries for Fraud, as % of Overall Transactions:
- Users around the globe spent nearly 900 billion hours in mobile apps in 2016 [1].
- The average consumer accesses at least 9 apps each day [1].
- US consumers spend roughly 2 hours and 15 minutes each day using a mobile app. Consumers in South Korea, Brazil, Mexico, and Japan average around 3 hours daily [1].
- 90% of all time spent on a mobile device is an in-app experience, as opposed to web browser [2].
- Mobile use is highest between the hours of 8pm and 12am [2].
- 56% of children ages 8-12 have their own mobile device [3].
- 38% of children under 2 years of age use a mobile device to access media [3].
Source: Forter Global Fraud Trends 2015
Mobile devices are ubiquitous, and children use these gadgets as a source of entertainment from an early age. They don’t understand the consequences of making an in-app purchase, and those transactions can add up quickly. Totals can easily exceed $100 in microtransactions before a parent becomes aware of the issue.
When the bill arrives, the shocked parent may file transaction disputes to avoid paying for these unauthorized purchases. The merchant loses sales revenue and interchange fees, and is also responsible for a chargeback fee if $5-50 per transaction. 100 chargebacks, even if the initial transactions were just $1 each, could end up costing the merchant thousands.
How to Minimize Disputes
There’s not much a seller can do once an in-app transaction is complete. Although customers can prevent kids from completing in-app purchases, the FTC’s decisions regarding Amazon, Google, and Apple make their position very clear: the burden is on merchants to verify customers.
We at PDSCC advise merchants to adopt these five practices to help prevent in-app purchase disputes and protect their revenue against unnecessary chargebacks:
Comprehensive Customer Service
Make live customer service available via phone, email, and social media, and provide that service 24 hours a day, seven days a week. This may not be a realistic option for some merchants, but there are alternatives. For example, auto-responders that inform customers when they can expect a live response is one option. There are also third-party answering services who can handle off-hours calls or provide overflow service during peak hours.
Validate Receipts
You may offer receipt validation with in-app purchases on major platforms like the Apple App Store and Google Play. This validates the purchase, using the receipt as part of the digital product redemption process. A validated receipt showing that the customer purchased and received their digital good provides a clear transaction record.
Incorporate Parental Controls into the Product
You can make it possible for parents to restrict their children’s permissions by incorporating parental controls into the app. For example, you can force users to enter a PIN before completing an in-app purchase, or verifying each purchase from a parent’s device. This can create friction and impact sales, but at least you’ll know that each sale is fully-permitted.
If you don’t want to go so far as to add parental controls into the app, you can at least add information to you site informing parents how to restrict their children’s purchases if they choose to do so.
Seek Chargeback Remediation
Even if you adopt customer service best practices and incorporate parental controls, you’re still likely to see an occasional chargeback. In these cases, it’s helpful to have a wealth of knowledge on the subject to identify and fight frivolous dispute cases (commonly known as “friendly fraud”). Click here to learn more about merchant chargeback certification and how you can prevent more chargebacks.
Minimize What You Can. Dispute the Rest.
It’s difficult to accept that you’re going to experience transaction disputes. If you rely on microtransactions or other in-app digital purchases, though, it’s impossible to avoid from time to time.
Your best bet: minimize incidents, then engage when chargebacks occur.
Interested in learning more about digital goods fraud?
Contact the Payment Dispute Standards & Compliance Council today to learn how to get involved.Contact Us
Last Update: November 1, 2017
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