By Gabe McGloin, Head of International Merchant Sales and Business Development at Verifi Inc.
Now that school is back in session, parents are looking back at the summer holidays with fond memories of outdoor games, day trips and lots of sunshine; however, children today are just as likely to remember their increased screen time. Gaming, watching movies, and generally just playing around on devices is much more familiar to this generation, but do parents realise the financial risks that come with more time on apps? Family fraud is a reality for many parents, with some receiving bills of over £1000 on in-app purchases made without their knowledge or consent. Often, these purchases are unintentional, with the child not realising the “coins” they are spending actually equate to real pennies and pounds.
When faced with these unintended charges, parents often look to go about getting these funds back – this is where chargebacks come into play. A chargeback occurs when a customer disputes a transaction that appears on their bank statement. In the case of family fraud, the transaction likely will have been made by a family member, either without permission or by accident. This results in a dispute being raised by the cardholder and provisional credits being provided by issuing banks. In turn, the issuer files a chargeback, which is imposed on the merchant to reimburse.
The cost of family fraud
In 2018, UK banks and card issuers lost £1.2 billion through financial fraud and scams, more than £500 million of which was a result of card-not-present (CNP) fraud. Chargebacks are one of the biggest financial challenges facing merchants and issuers alike as a result of CNP fraud, to which family fraud is a large contributor.
In particular, social media platforms may have difficulty with an increase of unintentional in-app purchases. With card-on-file accounts established by parents, children playing on their parents’ devices can make purchases during game play, unaware they are spending real money. The school holidays are a prime time for a likely rise in such unsupervised purchases, and the only way to stop it is for both issuers and merchants to implement measures to bring down the rate of chargebacks.
A recent report by Javelin Strategy & Research, commissioned by Verifi, found that 43% of the chargebacks experienced by digital goods merchants were a result of either friendly or family fraud. With new payment methods come new opportunities for fraud, whether they originate from family members or not, and with increased fraud comes increased chargebacks. The launch of PSD2 and its requirement of implementing two-factor authentication can help in fighting this battle, but banks and issuers need to do more.
Merchants: how to avoid it
If better prevention methods are put in place, merchants will not only be helping the customer but also themselves. 24% of those selling digital goods fail to recuperate their loss from chargebacks in their dispute representment. Data on digital goods and in-app purchases may not be collected as necessary documentation to ensure successful recovery of funds, making it difficult to build an effective dispute response in the allotted time frame. This may be particularly challenging as it relates to chargebacks resulting from family fraud. Since the transaction may appear to have been willingly made, there may be no impetus for the merchant to collect data on what seems to be a legitimate sale.
It’s not only beneficial to merchants from the perspective of direct profits, but also from the viewpoint of customer service. It takes time to investigate dispute cases, and even longer to refund the money. With length of time can come great reputational damage; if representment procedures are drawn out, merchants run the risk of antagonising customers, particularly if their children have racked up 4-digit bills!
If painstakingly long processes are avoided, benefits can be reaped. The Javelin Strategy & Research report found that 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 card-issuing bank without involving the merchant at all.
On the other hand, when disputes are resolved after a single call, customers report minimal changes to their purchasing behaviours. Per the Javelin Strategy & Research Report, 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. Given customer purchasing trends and the increase in payment method options, the number of disputes is likely to rise. In response to this, merchants need to have plans in place to ensure their brands aren’t tarnished as a result of lengthy resolution processes.
Payments: It’s time to take it seriously
Family fraud is on the rise, and, whilst it may appear to be an unintended crime, the problems it presents to the payments industry are just as severe as counterfeit fraud, CNP fraud, scams, or stolen IDs. So, there is a need for solutions, otherwise the hundreds of millions in losses will continue.
One of the biggest challenges facing merchants is knowing what transaction data to collect to ensure successful recovery and ultimately minimise chargebacks. The good news is that there are ways to make this happen. Automated systems that facilitate how transaction data can be shared with the issuer’s customer-facing employees, as derived from the merchant’s CRM system, can make a big difference.
Data-sharing solutions can enable issuers to deliver near real-time dispute notifications to merchants, enabling them to review and resolve disputes quickly. This will reduce the time, resources, and costs associated with the chargeback process.
All players in the payments industry have an important role to play in achieving collaborative relations between merchants and issuers. The implementation of data-sharing technologies can make a significant difference in reducing 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 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 positive impact.
The need for authentication
The biggest step in avoiding family fraud is the use of in-app customer authentication prior to making a purchase. The likelihood is that a child won’t know a security number or pin, or in some way have access to their parents’ fingerprints. This additional security will provide reassurance to parents that, whilst screen time may increase during the holiday period, their number of in-app transactions will not.
It is the responsibility of both merchants and issuers to ensure the battle against family fraud is won. For merchants, there needs to be education and support to implement more secure authentication and/or data-sharing solutions. Issuers need to explore implementation of data-sharing or other collaborative solutions, or they risk alienating customers and continuing to lose money. If these issues are tackled head on, the payments ecosystem in its entirety can win – and children can enjoy all the screen time their parents are willing to allow them during the holidays.
Fraud The Facts 2019
43% of the chargebacks
Forbes article 2019
BBC article, 2019