Friendly Fraud Vs True Fraud in Digital Merchant Payments

The primary difference between Friendly Fraud and what is labelled True Fraud lies in the identity of the fraudster. True fraud, also known as identity theft, starts with a payment card stolen from the authorised user. Once the theft is discovered, the account is closed, and a new card number is issued to the customer.

Friendly fraud occurs when a customer files a chargeback instead of trying to first obtain a refund from the merchant. Authorised cardholders dispute legitimate charges to their credit cards, pushing the bank to force a refund under the pretence that the merchant made an error.

Well-intentioned customers may accidentally commit friendly fraud because they don't understand the differences between a traditional return and a bank-issued refund. They assume a chargeback is simply a different way of getting their money back, like a regular return.

Other consumers knowingly abuse loopholes in the chargeback rules. These “cyber shoplifters” are maliciously attempting to get something for free…ripping you off in the process.

While some experts differentiate between chargeback frauds (malicious) and friendly fraud (an honest mistake), the distinction is largely academic. Both types of fraud involve filing an undeserved chargeback, and both have the same end effect. Whether through ignorance or intent, procuring a refund while retaining the goods or services purchased amounts to cyber-shoplifting.

In the case of friendly fraud, the fraudster is the cardholder. It could be the person whose name is on the card, or someone authorised to use the cardholder's account, such as a family member. Either way, a transaction was authorised, got past fraud protections, and seemed to be a legitimate purchase. The customer files a chargeback, attempting to regain the transaction amount yet holding on to the product or services rendered.

There are many claims fraudsters can offer as reasons for filing a chargeback.

Some of the most common include:

• The item or service wasn’t delivered.
• The item or service wasn’t as described (counterfeit, wrong colour, etc.).
• The merchant didn’t cancel the customer’s recurring payment when requested
• The original transaction wasn’t authorised by the cardholder.

As you can see, whether innocent or intentional, the outcome of friendly fraud is bad news.

Additional Costs of Friendly fraud :

While friendly fraud almost exclusively involves online purchases, it may help to consider a similar scenario in a brick-and-mortar store: regardless of whether a customer is deliberately shoplifting or simply walks out of the store holding some forgotten item, the merchant will have the same loss--at least in terms of merchandise.

With internet purchases, however, things get worse. For starters, friendly fraud happens after the fact. There's is no chance that your Loss Prevention team will catch the perpetrator sneaking out with merchandise tucked under a coat or in a purse. Friendly fraud doesn't manifest itself for weeks or even months after the transaction.

There are other losses that go beyond simply the cost of goods:

• Chargeback fees will be levied.
• Shipping costs will be lost.
• Transaction processing fees go to waste.
• Time and money will be required to dispute charges.

…and much, much more. 

In fact, recent studies show you can expect to lose an average of ￡2.24 in revenue for every pound lost to fraud. Businesses that fall under the category of "high risk" stand to lose even more. But much of this loss is avoidable, as we shall see.

Top 5 Reasons Why Friendly Fraud Flourishes :

Chargebacks were designed to protect users from unfair merchant practices and identity theft, but they're increasingly being misused by consumers: ironically, many merchants now need protection from a system originally intended to protect the cardholder.

But friendly fraud was not always the significant threat to businesses that it is today. 

There is a specific set of circumstances causing the number of these cases to increase exponentially in the last few years:

1.Inceased Popularity of Online Shopping -Friendly fraud is far easier to commit against online merchants, compared to brick-and-mortar stores. By and large, fraud detection systems and regulations for online merchants haven't kept pace with the growing volume of card-not-present transactions as cardholders migrate to online shopping.

2. Chargeback Regulations have not adapted to a Dynamic Market Place-The number of online transactions has exploded, dramatically changing the way people do business and contributing to an equally dramatic increase in friendly fraud cases. The rules governing the overall process, however, have largely remained static; they were designed for consumers in the 1970s and have not yet been updated to reflect the new merchant reality.

3. Customers  choose the Fastest and Easiest Option -The rise of the internet has caused another problem: immediacy has become the expected norm, and merchants can't keep up. In many situations, cardholders feel it's more efficient to file a chargeback with the bank than deal with the merchant for a refund. In fact, four out of five cardholders admit to filing at least one chargeback out of convenience. Loopholes in the chargeback system allow this behaviour to continue virtually unchecked, but at a high cost for the merchant. Most cardholders don't realise the consequences their impatience has on the merchant’s ability to do business

4. Banks are exacerbating the problem -In theory, the issuer thoroughly investigates every chargeback a cardholder files; in reality, banks are also being overtaxed by the rapid rise in overall chargebacks. Most lack the resources to keep up with the demand and end up requiring little or no evidence before submitting the chargeback to the merchant’s acquiring bank. This inability to verify the legitimacy of each chargeback creates a twofold problem: while merchants are getting hit with more unnecessary fees and damage to their credibility, banks are essentially telling consumers that filing a chargeback has no repercussions.

5. Merchants have a limited capacity to fight back - Technically, merchants have the right to challenge almost any chargeback; that's the good news. The bad news is, disputing a chargeback is a complicated, time-intensive process, and merchants have very little chance of getting the chargeback reversed. Even if a chargeback is filed fraudulently, the merchant is effectively "guilty until proven innocent": they shoulder the burden of validating the original transaction. Evidence for this type of validation is difficult to produce. What's more, there's nothing merchants can do to stop the cardholder from repeating this behaviour.

Can Friendly Fraud Be Prevented? As incidents increase and businesses lose more and more revenue, merchants have started wondering if there is anything they can do to prevent friendly fraud.

The answer, of course, is yes.

Fraudulent activity is rampant, but there are several steps merchants can take to help keep from becoming victims, including:

• Notifying customers before charging for recurring payments;
• Making sure the billing descriptor is easily recognisable;
• Using delivery confirmation;
• Keeping a well-organised paper trail of every transaction;
• Communicating regularly with customers;
• Granting refunds and cancellations as soon as requested; and
• Being on the lookout for any type of suspicious behaviour.

Being proactive about providing excellent customer service and documenting transactions is a merchant’s best weapon against friendly fraud. While this won’t eradicate every occurrence, it can certainly reduce it.

?Seek benefit from a network effect and access to occurrences of friendly fraud across other merchants.

( Excerpts from various reports on Digital Frauds )