Friendly fraud is a complex and challenging issue within the payments industry. It involves a cardholder identifying a purchase as fraudulent and raising a dispute, when in fact the transaction was made by the cardholder or people close to the cardholder (e.g. partner). With the ongoing rise of ecommerce – this costly and time-consuming ‘cry wolf’ scenario will continue to put pressure on issuers.
Addressing the problem requires an understanding of its cause. Friendly fraud is often the result of transaction confusion, with consumers not recognising a legitimate purchase from the information displayed about the transaction. This can happen when there’s a difference in the name of the customer-facing brand and the merchant’s registered name with payment networks. As a result, the transaction can’t be identified, leading to customers raising disputes over purchases that they made but do not now recognise. The absence of other identifiers such as logos on banking applications also causes transaction confusion as it withholds additional identifiers from the consumer.
Another problem is first-party fraud, which is a subset of friendly fraud. This involves an authorised user – like someone’s teenage child – making a purchase without the knowledge of the cardholder. This leads to the cardholder raising a dispute about a transaction they did not themselves make, but their household has received the good/service purchased and so the cardholder is responsible for the purchase.
Issuers have two ways to combat friendly fraud: challenge cardholders in disputes likely caused by friendly fraud and increase the detail of transaction data.
Challenging cardholders in disputes
Cardholders have grown used to the extensive fraud protection provided by card issuers and regularly use their fraud dispute rights. Being able to dispute legitimate transactions without being challenged leads to higher rates of disputes associated with friendly fraud.
Issuers raising challenges to cardholders when friendly fraud indicators are associated with a transaction, help them avoid the costs associated with initiating a chargeback and the operational costs of the likely challenge raised by the acquiring bank. Using indicators from transaction data, such as a history of purchases from the merchant or the type of transaction (purchase of a physical good is less likely to be fraudulent) increases the accuracy of these challenges.
While providing a friendly dispute process (for example, by means of an easy-to-use chatbot for cardholder self-servicing) can encourage more usage of the card (by giving peace of mind that if something happens, the cardholder can easily raise a dispute), it is crucial to challenge disputes on legitimate transactions, which hurt the whole payment ecosystem.
Increasing the detail of transaction data
A large cause of friendly fraud is transaction confusion due to a lack of merchant information displayed in the transaction data. This problem is best avoided by increasing the quality and quantity of data displayed with each transaction in an easy-to-understand format and language.
Thanks to payments’ innovation, issuers can now incorporate more detailed data from merchants using a variety of platforms – some of which have been acquired by major card payment network companies. They include fintechs such as Verifi, now owned by Visa, which helps to reduce chargebacks, and Ethoca, a Mastercard-acquired company that offers near-real-time sharing of dispute data and purchase details between financial institutions and merchants.
Integrating one of these kinds of platforms allows issuers to display information like the merchant’s logo, the merchant’s address, and even an alternative merchant name. Each of these additional pieces of information help to build a much clearer understanding of the transaction for the cardholder, and result in a reduction in the frequency of transaction confusion. Verifi and Ethoca, for select merchants, also provide digital receipts detailing the goods/services provided, helping cardholders recognise the purchase. This enables card issuers to raise a more comprehensive challenge to friendly fraud disputes – thereby helping to settle disputes in a timely manner.
How fintech can help issuers
Issuers can invest time and resources in improving their systems to detect friendly frauds, reduce their operational costs and offer a better cardholder experience to their cardholders. However, an easier and faster approach is to use off-the-shelf solutions offered by fintech innovators focused on tackling challenges in the fraud and dispute domain.
About the author: Fatemeh Nikayin is the Co-founder of Rivero – a privately held company based in Switzerland, with a strong focus on simplifying card payments operations. Rivero provides SaaS solutions for all players in the card payment ecosystem such as issuers, acquirers, BaaS, and FinTechs. With Kajo, Rivero simplifies the process of navigating current and upcoming scheme compliance obligations, and with Amiko, provides a solution to manage fraud recovery processes and resulting disputes.