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FRIENDLY FRAUD: IT’S TIME WE TAKE IT SERIOUSLY

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.

          LINK DRILLDOWN

Fraud The Facts 2019

https://www.ukfinance.org.uk/system/files/Fraud%20The%20Facts%202019%20-%20FINAL%20ONLINE.pdf

report commissioned by Verifi

https://uk.verifi.com/chargeback-triangle-process-javelin-research-study/

our research

https://uk.verifi.com/chargeback-triangle-process-javelin-research-study/

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Banking

OPEN BANKING: ARE CONSUMERS KEEPING AN OPEN MIND?

Last September, the European Union’s regulatory requirement for banks to open up their payment accounts via application programming interfaces (APIs) came into effect. Since then, open banking has taken centre stage within European retail banking and payments. In this blog, Elina Mattila, Executive Director at Mobey Forum, shares insight into how emerging consumer attitudes may impact open banking services in the coming months.

It has been over six months since the revised Payment Services Directive (PSD2) came into full effect and with it, required banks to allow third party providers to access payment initiation and account information. While the regulation was designed to facilitate open banking, the market demand was uncertain. Would we, as consumers, choose to embrace the new services enabled by open banking? And if so, under which conditions?

To understand consumer attitudes, Mobey Forum and Aite Group partnered on a pan-European study to determine the appetite for open banking services amongst 1000 consumers in Finland, France, Germany, Spain, and the United Kingdom. The study, launched in November 2019, revealed many important consumer trends and attitudes, including key priorities and potential barriers for adoption.

 

Consumer appetite for change

The consumer benefits of open banking are largely perceived to be compelling, yet this counts for little if the providers of those services are not deemed trustworthy. This is an observation reflected in the study, which highlighted consumer confidence in service providers as critical to open banking adoption. People want clear visibility of who is managing their finances, and the overwhelming majority (88%) would prefer their primary source of open banking services to be their main bank, as opposed to other banks or third-party providers (TPPs).

Consumers also indicated high levels of trust in their current bank of choice, reflected by 77% preferring to use a financial product comparison service offered by their main bank. By enabling customers to compare the pricing and conditions of a range of financial products on the market, they feel more comfortable that banks have their best interests at heart. This is a welcome trend, and one which should be celebrated in the aftermath of the 2008 financial crisis. For the banking industry to have rebuilt trust levels in this way bodes well for consumer adoption of future innovations.

With a trusted provider, one third of consumers were then either ‘very interested’ or ‘extremely interested’ in integrating open banking services into their financial routine. This applied to specific use cases: account information services (32%), pay by bank (33%), purchase financing (25%), product comparison (35%) and identity check services (35%). Unsurprisingly, consumer willingness to adopt these services relies heavily on providers continuing to prove that they can be trustworthy stewards of personal data.

 

Consumer concerns

For those unwilling to adopt open banking, concerns largely focused on reservations around security and privacy. As open banking becomes more sophisticated, it will be interesting to analyse the nuances around how consumers engage with third parties. Established brands are perhaps more likely to be trusted by consumers than lesser-known online retailers. For this reason, consumers may hesitate to engage newer companies than brands they are already familiar with. In an industry as varied as finance, this creates additional intrigue in the ongoing battle for market share between the newer ‘challenger’ banks and the older, more established European banks.

Consumers might, however, be willing to deprioritise trust and, instead, favour convenience and usability. When questioned over their willingness to adopt a new payment method, for example, 91% of respondents indicated that they could be tempted to switch either by financial incentives or the promise of greater convenience.

 

The path forward

While open banking is still in the relatively early stages of development, it has made significant progress in a very short period of time. Not only is it allowing consumers to share financial data with authorised providers as they wish, but it is set to spark more competition and innovation within the market.

From a business perspective, open banking is expected to create lucrative new revenue streams, particularly for companies which are able to innovate quickly and react to consumer demand. It is prompting consumers to reconsider how they manage their finances and – most excitingly – it’s not even close to reaching its full potential. It should bring a whole new era of service partnerships between banks and TPPs, which will enable a new generation of innovative financial services.

For the industry to truly fulfil its potential, it is vital that stakeholders are able to explore new business models, innovations and changing customer expectations for open banking in a commercially neutral environment. Mobey Forum’s open banking expert group provides exactly this, and we look forward to supporting our members as they shape the future of digital financial services.

 

Where to find out more

The opportunity for open banking is explored in more detail in a report by Mobey Forum and Aite Group, entitled Open Banking: Open Minds? Consumer Appetites for New Banking Services. It provides banks and other financial services stakeholders with a market view on consumer appetites toward new open banking services and explores the possible roadblocks to consumer adoption. It is also discussed in a podcast featuring key representatives from Interac, Erste Group Bank and Strands Finance.

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Banking

HOW CAN PLATFORM AS A SERVICE UNLEASH COMPETITIVE ADVANTAGE FOR BANKS?

By Paul Jones, Head of Technology, SAS UK & Ireland

 

Due to both regulation and practical realities, banks spend much of their time, effort and money on activities that make zero difference to their competitive position. Processing transactions, booking trades and managing compliance for anti-money laundering (AML) and know your customer (KYC) efforts are vital tasks for any bank, but they make almost no contribution to differentiating a bank from its competitors.

According to McKinsey’s 2019 Global Banking Review, outsourcing these activities presents a huge opportunity for optimisation: “By transferring non-differentiating activities to modular industry utilities, banks could potentially improve return on equity by 60 to 100 basis points.”

Besides the immediate financial benefits, if banks can optimise their resources to spend more time focusing on developing new digital services and delivering an outstanding customer experience, it’s a clear win-win in terms of both saving costs and growing the business.

 

Dissecting your differentiators

But how far can we stretch the idea of “non-differentiating activities”? Is risk management a differentiator for banks? How about fraud detection? Or even marketing? I think the answer is it depends. Within each of those three functions, there are areas where top banks can develop competencies that give them a real edge over the competition. If you have the best risk models, you’re likely to make more advantageous trades than your counterparties. If you’re the smartest at catching fraudsters, they’ll focus on weaker prey. And if you understand your customers better than your competitors do, you’re more likely to keep them.

In fact, McKinsey estimates that the opportunities to enhance capabilities such as risk, fraud detection and marketing through artificial intelligence and machine learning could deliver up to $250 billion in value across the banking sector.

In each case, the data scientists who devise your predictive models for calculating exposure, detecting anomalies and segmenting customers are the key to your success. Their skills put them at the pinnacle of all your employees in terms of creating real business value. But data science isn’t a standalone activity, and there are other elements of risk, fraud and marketing operations that don’t add much competitive value – what we might call the “platform” elements.

 

Data science as team sport

On the scale at which most banks operate, data science isn’t just about the individual brilliance of your PhDs. It becomes much more of a team sport – and like any professional sport, it quickly develops its own back-office requirements. You need software, databases, development tools, infrastructure, processes, data governance frameworks, monitoring and analytics, auditing and compliance capabilities, and business continuity/disaster recovery strategies. That’s what I mean by “platform” – all the basic components you need to run a successful enterprise-scale data science programme and get innovation into production.

The good news is that you can absolutely outsource your marketing, fraud and risk analytics platforms, just like any other non-differentiating activity. Running analytics and data science platforms at scale is known to be a tricky problem, even for tech giants like Google, but with the right combination of technology, processes and expertise, it’s perfectly possible to let an expert partner take care of the day-to-day operations.

 

What to look for in an outsourced platform

When you are assessing analytics Platform as a Service (PaaS) offerings, there are a few key things to look for. First, your partner should provide a fully managed cloud infrastructure that enables quick onboarding and makes it easy to ramp up new projects and close down old ones.

McKinsey estimates that the opportunities to enhance capabilities such as risk, fraud detection and marketing through artificial intelligence could deliver up to $250 billion in value across the banking sector.

Second, your partner should have the right expertise to take responsibility for handling all day-to-day system administration and model management duties, as well as batch analytics tasks such as regulatory calculations. Offloading this routine work will reduce costs for the bank and also slim down the risk profile because your partner will keep the platform fully up to date with the latest security updates and patches.

A good PaaS offering will also include process automation to increase throughput for the data science pipeline. This is a well-known issue in the industry. For example, Gartner estimates that over 50% of models don’t make it to production, and a recent survey by SAS showed that it takes organisations on average three months to deploy a new model.

 

Speed production with DevOps

You should look for a PaaS with built-in DevOps procedures that help to accelerate deployment to a fraction of that time while maintaining rigorous quality controls. The ability to put models into production more quickly will make you much more agile – so you can respond more quickly to emerging market risks, counter new types of fraud, and adopt the latest artificial intelligence and machine learning (AI/ML) techniques to support your marketing campaigns.

Critically, any PaaS contract should guarantee that your data and models remain your intellectual property and that you have complete control of where your data is stored and how it is used. With the right separation of duties between you and your PaaS provider, your data science team can focus on the valuable, exciting aspects of model design and training, while your partner handles all the mundane operational work around deployment, data processing and governance.

We’re working with banks across Europe to provide exactly this type of PaaS for marketing, fraud and risk analytics. If you’re interested in how to help banks drive digital transformation with cloud-based analytics, please read my previous blog post here.

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