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




6 Comments on “5 Ways to Detect Friendly Fraud”

  1. Do you have any more recent stats on chargebacks and friendly fraud? Many of these are from 2010, and I’ve seen some newer figures. Also, although you cite JP Morgan chase, they are really only providing access to a report from the CyberSource merchant survey, so credit for this source should be given to CyberSource instead.

  2. The numbers are higher for sure. Most friendly fraud is still reported as a fraudulent purchase. I sell virtual goods making me a huge target for this. I have proven easily that people are chargebacking and calling it fraud when it’s not. I ID verify my customers and even make them show me the card used to purchase as well as their ID next to their face. They still chargeback as fraud. And sometimes, they still win.

    There is one very quick way to lower “friendly fraud”. That is to have consequences for the customer’s attempting it. Currently, nothing happens to them. When if fact what they are doing is committing online theft. The funds are stolen from the merchant immediately and then the merchant must wait roughly 2 months to hopefully win his money back, In the case the merchant wins, immediate charges should be pressed against the customer for theft. This is no different then robbing a jewelry store, then the police catching the thief 2 months later. Just because the store got their jewels back does not mean everything is ok. They were still stolen from them with no intent of being returned. This is jail time for brick and mortar businesses, but absolutely nothing for online businesses.

    The day you start seeing on the news and reading online about thieves going to jail for committing online theft will be the day friendly fraud starts to go down. Currently, there is no real reason not to try a chargeback. Worst case scenario, you paid for a good you already intended on buying. Best case scenario, you got something for free! Why not try it?

    Fraud and friendly chargebacks are too simple to solve but banks, VISA, MasterCard, etc. refuse to do so. Phone verification would be a huge step to eliminate fraud and friendly fraud. Let merchants verify phone numbers against the bank account just as we can verify addresses (AVS, which is useless). But a phone number can be proven to be the phone the customer has in their hand with a simple text message or phone call verification. So now the merchant knows his customers phone number, he just needs to verify the phone matches the credit card. Now no customer can lie about making the purchase and fraud will be much harder since it will require stealing the credit card AND the phone.

    Simple one time use online pin system could easily solve fraud as well. Allow the merchant to require a pin for transactions. Then the customer must login to their bank account and generate a one time use pin that expires in 15 minutes. Bam, no more, “my card was stolen crap”. The only arguments people make about solutions like these are the hassle they add to the customer. But shouldn’t that be the merchants decision? Oh that’s right, this whole thing is about the profits for banks and card companies.

    These are ideas I can come up with one after another in just minutes of thinking. Why don’t they exist? Because they have no intent solving fraud or friendly fraud. The fact is, chargebacks are profitable for banks and credit card companies. Come this January, they will be even more profitable.

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