Gabe McGloin, Head of International Merchant Sales and Business Development, Verifi, Inc.
Is ‘friendly fraud’ the crime that dare not speak its name – or are we simply too frightened to talk about it?
In their recent research, Fraud The Facts 2019, UK Finance reveals that while UK banks and card issuers managed to prevent £1.66 billion worth of fraud in 2018, the industry lost £1.2 billion through financial fraud and scams. This means that banks and payment providers are hitting a success rate of just 57% for their anti-fraud efforts. Given that a significant proportion of these losses – more than £500 million, in fact – is the result of card-not-present (CNP) fraud, it’d be understandable to assume that this area is explored in detail in the research report. However, the UK Finance research doesn’t highlight one of the greatest financial challenges facing merchants and issuers alike – that of chargebacks and friendly fraud.
Chargebacks and friendly fraud
Chargebacks occur when a customer demands a refund of a card payment through their card-issuing bank. There are many reasons, both legitimate and fraudulent, why chargebacks occur. It could be because the customer has received a defective product, or simply because they forgot they ordered the item online. But one key reason is so-called friendly fraud, which, as we’ll see, is far from amicable.
Friendly fraud occurs when customers dispute legitimate transactions to obtain refunds for purchases they actually made. Provisional credits are provided by issuing banks, following a customer initiating a transaction dispute with them. In turn, the issuer files a chargeback, which is imposed on the merchant to reimburse.
The situation is further complicated when a purchase is unknowingly made by a member of the customer’s family, rather than the customers themselves. Friendly fraud of this kind has come to be known as ‘family fraud’ – with parents disputing the purchases, and chargeback claims being initiated as a result. The waters have been further muddied by the issue of in-app and voice assistant purchases, particularly common with children using their parents’ accounts without permission.
According to a report commissioned by Verifi from Javelin Strategy & Research (the “Javelin Strategy & Research report”), 43% of the chargebacks experienced by digital goods merchants are the result of either friendly or family fraud.
The issue is exacerbated when 24% of merchants selling digital goods fail to recuperate their loss, because digital goods and in-app purchases frequently are not supported by the necessary documentation or paper trail to ensure a successful representment, or dispute response.
Suffice to say, chargebacks are a significant outlay to retailers, and not all of the damage caused by chargebacks is strictly financial. Aside from the cost of investigating and, if necessary, refunding the monies, businesses can suffer severe reputational damage as a consequence of long, drawn-out representment procedures. According to the Javelin Strategy & Research report, when customers question the veracity of their card transactions, 66% of the time they will blame the merchant. What’s more, up to three-quarters of customers disputing a transaction will go directly to their bank or credit card provider without involving the retailer at all.
On the other hand, when disputes are resolved after a single call, customers report minimal changes to their financial behaviours; 81% report no change in their card usage, and 64% report no change in their willingness to shop at the merchant where the dispute occurred.
A robust response
It’s clear that while friendly and family fraud are considered ‘victimless crimes’, the problems they present to the payments industry are just as severe as counterfeit fraud, CNP fraud, scams, or stolen IDs.
Yet the industry does not seem to be taking the issue nearly as seriously as it deserves, and it’s not enough for these terms to enter the lexicon of fraud and there lie fallow. The payments industry also needs to develop robust solutions so that it can claw back some of the hundreds of millions of losses experienced each year.
One of the biggest difficulties for merchants is knowing what transaction data they need to collect to maximise their chances of successful recovery, or even chargeback prevention. The good news is that technical solutions to this problem exist; for example, through automated systems that facilitate how transaction data is shared with the card issuer’s customer-facing employees, as derived from the merchant’s CRM system.
These solutions can empower issuers to deliver near real-time dispute notifications to merchants, enabling them to review and resolve disputes quickly, thereby reducing the time, resources, and costs associated with the chargeback process.
Key players in the financial industry have an important role to play here, evangelising and advising on the processes and data-sharing technologies that can make a real difference in reducing friendly and family fraud. Even relatively simple steps made by merchants, such as setting up clearer billing descriptors, can significantly reduce the amount of erroneous fraud claims caused where a customer doesn’t recognise a purchase that they’ve made. Likewise, sending a message to the customer to ensure they are aware that they are about to make a purchase, including the exact amount of the transaction and the billing method, can make a big difference.
Another method is to confirm the transaction using in-app customer authentication. For example, request the customer enter their payment card number or pin, submit a biometric scan such as a finger print, or ask customers to submit a code that is sent to them via text message. These methods help to reassure customers that the security of their purchase is of high priority, putting a personalised barrier in place to notify parents (or unwitting account owners) of any questionable transactions before they are made, reducing the risk of disputes.
Fraud hurts us all, and it is everyone’s responsibility to help combat the scourge of financial crime. By helping to educate and support merchants in their battle against fraud, facilitators in the payments industry will not only help to reduce their own losses but will forge stronger bonds with their retailer clients – making it a win-win for every member of the payments ecosystem.
Fraud The Facts 2019
report commissioned by Verifi