How Issuers Can Prevent Friendly Fraud: A Fusion of Data & Technology
What is Friendly Fraud? And What are the Consequences for Issuers?
The majority of transaction disputes are believed to be caused by fraudulent card usage (1). Among those, the so-called “friendly fraud” or “family fraud” is considered to be the 3rd most significant cause for eCommerce disputes (2).
Actual fraud is when an illegitimate third party has misused the cardholder’s payment information in a purchase. However, friendly fraud is when a cardholder initiates a dispute on a transaction they have authorised but forgotten or if a family member performed the transaction without the cardholder’s knowledge. While friendly frauds occur across industry sectors, for digital goods & services, up to 90% of all disputes can be caused by friendly fraud (2).
According to Mastercard, card issuers and merchants incur $15–70 in operational cost for every dispute. Given the costs, operational challenges, and impacts on the relationship with cardholders, issuers have strong incentives to prevent disputes, especially the unjustified ones that resulted from friendly fraud (1).
How Can Issuers Prevent Friendly Fraud?
Several measures could help issuers in preventing friendly fraud. In this short post, we specifically focus on two approaches we find the most effective.
1) Challenging the cardholder in case of friendly fraud indications
From an issuer point of view, more and more cardholders are becoming aware of the “zero liability policy” of card payments and therefore know about their dispute rights. A good dispute experience can encourage more frequent payments and position a card as “top of the wallet”. However, making it too easy for cardholders to dispute legitimate and authorised transactions can lead to unjustified disputes, such as friendly fraud, which hurts the whole payment ecosystem (2).
To avoid the operational costs of submitting the chargeback and handling the somewhat likely objections (in the form of a 2nd presentment or pre-arbitration) from the acquiring bank, it makes sense to challenge the cardholder in case of friendly fraud indicators. Some indicators are previous, undisputed purchases at the same merchant, card on file transactions, and digital goods purchases at eCommerce platforms such as app stores.
To balance challenging the cardholder while at the same time maintaining a good relationship with cardholders, having detailed insights on the transaction can provide additional and more substantial indicators.
2) Provide detailed insight on transaction data
In most cases, friendly fraud is raised out of not recognising a transaction. The cardholder raises a dispute simply because they have forgotten about the transaction, the merchant name is misleading, or they are unaware that a family member has performed the transaction. Issuers can avoid this by providing more detailed information on the transaction to help the cardholder identify it or trigger a conversation within the family.
Thanks to platforms like Ethoca (a Mastercard company) and Verifi (a Visa company), it is now possible to provide cardholders with rich and detailed information on a transaction. For example, an alternative merchant name, the merchants’ logo, contact and address details or information about the device used for the purchase. In addition, for some merchants, it is even possible to retrieve a digital receipt, which contains information about the goods or services that have been purchased. All of which can help the cardholder to remember the transaction and avoid proceeding with a dispute.
Ethoca (Consumer Clarity API) and Verifi (Order Insight and Order Insight Digitals APIs) provide issuers with much more detailed transaction data from the merchant side. Issuers can leverage the data provided from the merchant side to provide more detailed transaction information in the app or digital channel to reduce cardholder’s confusion about a transaction. In addition to educating the cardholder, integrating such information in the issuer’s application landscape can empower the call centre agents to validate better and/or confirm a fraudulent transaction when talking to the cardholder.
What Role Do Payment Schemes Play in All That?
In a recent announcement, one of the international payment schemes released an announcement that strongly recommends a new way for merchants to share their digital logo with the scheme so that issuers can display it to their cardholders for an improved experience with billing and dispute resolution. For issuers, it will become mandatory to display merchant logos in digital channels. This requirement can be seen as the first step in this direction, and we can expect more of it in the future.
How Can Issuers Provide Such Information in Their Digital Channels and Internal Applications Systems?
There are several ways to leverage the additional merchant information. One way is that issuers directly integrate with the existing APIs offered by Ethoca and Verifi in their digital channels, chargeback and back-office systems.
Another approach (perhaps a lighter & quicker approach) is to use off-the-shelf solutions that leverage such APIs. For example, using a fraud/chargeback dispute solution with direct integration with Ethoca and Verifi can simplify the integration effort in the digital channels of the issuer.
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