5 Ways to Detect Friendly Fraud

Emily VuittonFraud Prevention6 Comments

Prevent and Detect Friendly Fraud

Clearly, stopping fraud before it starts is the key to combatting its costly effects. But how do you do that – especially in cases of friendly fraud, in which the card numbers, addresses and names of purchasers are all good, but their intentions are not?

The Lexis Nexis True Cost of Fraud Study 2016 found that roughly 28 percent of total fraud losses were the result friendly fraud. Moreover, chargeback fraud accounts for another 28 percent of fraud losses. The losses to true fraud account for just 23 percent. A similar study conducted by JP Morgan found that friendly fraud is estimated to account for 30 percent of all chargebacks.

Unfortunately, businesses can’t rely on banks and credit card companies to protect them – these groups are in it to protect themselves. In fact, 71 percent of business owners answered negatively when the USDT Corporation asked them if they “…feel that the card issuing banks and card associations/networks have taken the necessary precautions to protect the industry from losses associated with friendly fraud?”

According to CyberSource, “By configuring your order flow with the appropriate checks properly in place, you can maximize legitimate revenue while deterring friendly fraud.”

Here’s how to do it:

1. Include Payment Agreements in Your Checkout

Adding a simple payment agreement to your checkout process can make a huge difference in two ways:  by discouraging fraudsters from engaging in the practice and by giving you legal “legs” to stand on if a chargeback does occur. Thankfully, most businesses already have some sort of documentation in place (72 percent of companies in fact, according to the USDT Corporation survey mentioned above). But if your business is one of the 28 percent that does not, it’s time to revamp your checkout process.

You can opt to create something like this yourself, but there are also affordable third-party options available that minimize the amount of effort required. DocVerify is one such company that collects customer data that proves the “intent to purchase” and stores it securely. The service offers multiple pricing plans starting at just $19.99 a month with discounts for yearly service contracts.

2. Use Predictive Device Identification Tools

According to First Data, “Predictive analytics, payment and transaction monitoring allows financial institutions to both deter and combat first-party fraud. If a customer is identified as suspicious, the activity can then be checked before the fraud is perpetrated thus reducing the risk to the issuing institution.”

These software solutions are advancing every day and include new technologies such as advanced, third-generation device identification software. These cookie-free solutions allow companies to expose an individual’s intent, hidden in the attributes of the user’s device.

However, these tools are not the only solutions you should employ. Over 50 percent of businesses surveyed say that the current fraud prevention tools available to card-not-present (CNP) merchants cannot accurately predict whether or not a customer will engage in friendly fraud.

3. Use Bad Customer Lists (Wisely)

In addition to IP geo-location and device fingerprinting, you should also use negative customer lists to help prevent friendly fraud – but do so wisely.  These lists, either created by individual companies or shared across a network, won’t prevent fraud before the initial instance, but can help companies like yours to avoid falling victim to the same fraudster in the future. Before implementing this strategy, be sure to check the laws in your location to ensure that these types of lists do not violate any consumer protection laws.

4. Beware the Size of the Order

Of course you want your customers to load up their digital shopping carts, but keeping an eye on the size of those orders (and adding higher levels of security to more costly purchases) can save your company some bacon.

In one of its studies, JP Morgan found that median online sales topped out around $100 (depending on the industry, of course.) The median fraudulent transaction, on the other hand, was over twice that amount at $250. You can use this data to your advantage. By spending most of your fraud prevention efforts combatting higher dollar orders, you’re apt to not only “catch” more fraudsters, but also save yourself more per transaction.

5. Track Orders by Country

Friendly fraud is three times more likely to occur on international orders than on domestic purchases.  As much as 2 percent of international orders are fraudulent (compared to just 0.6 percent of domestic ones).

Considering that 58 percent of merchants accept orders from outside the U.S., the potential for economic devastation is staggering.  You can choose the “extreme” route and eliminate your international orders altogether (as 25 percent of merchants have done in the last year or so) or you can add extra security and scrutiny to those orders before they are processed.

Bottom Line: Friendly Fraud is Hard to Prevent

It’s not enough to sit on the sidelines and justify doing nothing by quoting the costs of common fraud prevention measures.  Friendly fraud cuts into your bottom line now and – if trends hold steady – it will become an increasing problem in years to come. Preventing friendly fraud is challenging, so your business needs to have a dispute management processes in place to respond to, reveal, and recover revenue from chargebacks that occur as a result of friendly fraud.




Managing Chargebacks In-House