Are You Prepared for Friendly Fraud?

There is a long-running misunderstanding about fraud that can potentially set up merchants for failure. Many merchants mistakenly believe that the most common type of fraud falls into the white-collar crime category. Sadly, this is very far from the truth.
The reality is that merchants of all sizes are repeat victims of friendly fraud. This term appears to be a misnomer, but one that has become commonplace in the payments industry. Friendly fraud is so common that most merchants don’t even realize it’s happening. Rather, they assume the threat of revenue loss, increased issuer/acquirer fees, and credit card monitoring programs are just compulsory features in the business world. This thinking is even more prevalent among CNP merchants, many of whom are still learning how to gain a foothold in the growing m-commerce space.
Debunking Friendly Fraud
To understand the disruptive force of friendly fraud, it helps to reframe it in a traditional brick-and-mortar sales model.
A brick-and-mortar sale can resemble the following:

  1. The customer buys the product in the store
  2. Takes it home and decides it isn’t right or they no longer want it
  3. The customer returns to the store with the product and returns it.
  4. The customer receives a refund or store credit
  5. The merchant is able to restock the product and has not lost any revenue

A CNP sale can resemble the following:

  1. The customer buys the product online with their credit card
  2. The product is delivered to the customer’s home and left at the front door without a signature
  3. The customer decides they don’t want the product
  4. The customer contacts their credit card-issuing bank and asks for a refund
  5. The credit card-issuing bank complies and files a chargeback against the merchant
  6. The merchant has to deal with revenue loss, the cost of chargeback representment, fees from the acquirer and card brand, and lost merchandise
  7. The customer receives a refund, keeps the product, and enjoys using it

In short, the customer effectively steals the product from the CNP merchant and is never charged with theft. There is nothing friendly about friendly fraud. Yes, people make mistakes or regret buying an item, but this is not the fault of the merchant.
Merchants have the power and ability to stop this vicious cycle of fraud. By implementing smart payment solutions and making internal process changes, friendly fraud can be stopped. Until merchants are proactive in stopping this type of fraud, they will continue to experience lost revenue, issuer fees and penalties, and the cumbersome chargeback representment process.
How Friendly Fraud Happens
Savvy fraudsters know that merchants are loath to suggest that a customer is stealing from them, for fear of damage to their brand and reputation. Combine this with the longstanding belief that “the customer is always right,” and merchants must move to be proactive in stopping friendly fraud.
The first step in stopping friendly fraud is in knowing how it typically occurs:

  • Customer claims the item wasn’t delivered
  • Customer claims the purchased item doesn’t match the online description
  • Customer claims they returned the item and have yet to receive a refund
  • Customer claims the order was cancelled but the item was still delivered
  • Customer claims not to remember making the purchase

The step to take in response to one or all of these five theft approaches is to acquire knowledge and evidence. This is where having an intelligent solution such as Verifi’s Cardholder Dispute Resolution Network (CDRN), which connects merchants and their customers, can help end the confusion over these disputed purchases.
Take Control and Stop the Cycle
Merchants would be wise to look beyond the standard approaches to fraud prevention and concentrate on the latest in data intelligence technology. Merchants should display a clearly visible and concise return/refund policy, maintain a proactive customer service team, submit clear billing descriptors, and manage a virtual paper trail that tracks the purchase and delivery of the item.
The time has come to move beyond traditional methods of fraud prevention and to be vigilantly proactive in stopping the revenue loss. Merchants should take advantage of key fraud prevention technologies including:

  • IP intelligence. Deep analysis of the IP Address used for the transaction, to monitor possible risks associated with the location
  • Device fingerprinting. Uses device information and reputation scoring to validate the transaction request
  • Merchant Co-Op. Transactions are compared against a list of orders, looking for matches with fraudulent accounts
  • Address Verification Service (AVS). Verifies the address connected to the cardholder using a comparison look-up
  • 3D Secure. Uses a three-domain model to validate credit and debit card purchases
  • Tokenization. Account and card information is replaced with a secure token identifier
  • Geolocation. The location of the cardholder and the customer are compared
  • SSL. Provides a secure encrypted communication between customer devices and payment solutions

These innovative anti-fraud technologies put the power back in the hands of merchants. The deep knowledge and data collection of these technologies gives merchants the upper hand. Now merchants can understand customer patterns, identify risk before it happens, and find lapses within their payment environment.
The choice is up to you. It’s time to act and take control of friendly fraud. We invite you to contact us to learn more about CDRN and our expertise in fraud prevention technologies. We are fraud prevention experts, and we are committed to supporting merchants to help stop friendly fraud.