As seen in The Paypers

By Keith Briscoe, CMO

In rapidly growing sectors like digital goods, the majority of today’s card-not-present (CNP) fraud is so-called ‘friendly fraud’. Sometimes called ‘false claims’, friendly fraud happens when cardholders wrongly request refunds for legitimate purchases. With 86% of card disputes believed to be fraudulent, and a rate of growth in the double digits (Lexis Nexis Total Cost of Fraud 2012-2015), it’s no wonder the FBI views friendly fraud as the third biggest problem in ecommerce.

To protect themselves from this growing threat, merchants and issuers are implementing multi-layered fraud detection and prevention systems. Unfortunately, friendly fraud stems from a spectrum of behaviours that are challenging to detect; these are, after all, legitimate cardholder transactions that don’t look like typical ‘third-party’ fraud. Before merchants and issuers can start to get a handle on this problem, they need to better understand its many faces.

The spectrum of friendly fraud

Approximately 28% of ecommerce revenue is lost annually to friendly fraud (MRC Global Fraud Benchmarking Study 2014). It is usually not detected by typical fraud prevention tools because the consumer was a good one until they decided to dispute the transaction. So, how does one devolve from loyal customer to dishonest fraudster?

The spectrum of friendly fraud behaviour ranges from benign to hostile:

1. BENIGN: Cardholders might mistakenly dispute charges they made because they forgot about them. Or, they don’t recognize the vendors listed on their card statement due to confusing merchant descriptors.
2. BENIGN: Family members linked to the primary cardholder’s account might make purchases that aren’t known to the primary cardholder.
3. HOSTILE: Cardholders may dispute a transaction because they regret the purchase and want their money back. Or, they may want to ‘game’ the dispute process for personal gain.

What’s more, even if merchants and issuers suspect that the cardholder is not being honest, they look at the lifetime value of the relationship and focus on keeping good customers in order to drive future sales. This lack of penalties for cardholders who game the system encourages future abuse.

Friendly fraud and false declines

One of the unintended consequences of so many false claims due to friendly fraud is an increase in future false declines. These happen when a merchant or issuer incorrectly declines a legitimate transaction due to the suspicion of fraud. Referred to by some as ‘false positives’, false declines create a negative experience for the customers involved and reduce merchant and issuer revenue. Some cardholders completely abandon their purchase after a declined transaction, while others look for another online retailer that will accept their card or switch to an alternative card in their wallet. These false positives represented USD 117 billion in lost transaction-based income in 2015 (Javelin Strategy Webinar, “Sky Rocketing CNP Fraud Jeopardizes Top of Wallet Status” July 2016).

What can be done to fight back today?

Winning the war on friendly fraud requires implementing solutions capable of addressing this insidious threat in real-time, while simultaneously reducing – or even eliminating – disputes. It also means changing cardholders’ behaviours to reduce the likelihood of them disputing legitimate transactions – regardless of whether their behaviour is benign (e.g., an unrecognized transaction) or hostile (e.g., intentionally gaming the system for personal gain).

Solutions that enable issuers and merchants to present detailed purchase data to cardholders, and help them “recognize” unfamiliar transactions, will increase the number of cardholders who accept liability for their transactions and eliminate the costly chargeback dispute process. This new class of solutions will also address the increasing trend toward abusive, repeat dispute behaviours. The significance of this repeat behaviour was recently illustrated to us by one of our merchant customers who estimates that 40% of cardholders who realize how easy it is to file a false claim will do so again within 60 days.

What does the ultimate solution look like?

Today’s best practices focus on effective recovery methods which help to reduce losses attributed to friendly fraud. Unfortunately, they’re not a long-term solution and may disrupt the customer experience. For one, a customer who disputes a charge that is ultimately deemed legitimate will need to be rebilled by the issuer – potentially causing that customer more frustration and confusion. It’s a vicious cycle that erodes customer experience over time and increases dispute volumes and associated calls for card issuers.

The better solution to winning the war on friendly fraud is reducing or eliminating cardholder disputes proactively and in real-time through new innovations powered by issuer-merchant collaboration. This solution is focused on helping cardholders recognize their own transactions, or those of someone in their household. More importantly, it allows merchants and card issuers to collaborate in a pivotal ‘moment of truth’ that sets the stage for a superior customer experience.

Self-service tools via the online statement or mobile app would allow the cardholder to have immediate insight into a potentially questionable transaction – without ever needing to contact the merchant or their bank. This would completely remove the element of friction from not only the immediate dispute process, but also future potential purchases (i.e., the painful claims process and card re-issue experience can be avoided entirely, ensuring no disruption to future spending).

A fraud and dispute prevention tool based on real-time collaboration between merchants and issuers would potentially eliminate and greatly reduce the need for chargebacks. Furthermore, it will lead to a more satisfying purchase experience for customers, merchants and issuers alike. Not only would merchants and issuers reduce costly chargebacks, but customers in this new universe would be free from unnecessary purchase disruptions and feel better and more confident about using their cards to shop.  Ultimately, both card issuers and merchants would reap the financial rewards that come with a truly frictionless customer experience.