The Three Types Of Fraud

Sydney VaccaroChargeback Basics, Fraud PreventionLeave a Comment

The Three Types of Fraud

Fraud. We all try to avoid it, prevent it, and stay as far away from it as possible. By definition, fraud is wrongful or criminal deception intended to result in financial or personal gain. So how does fraud happen to your company? We will dive into what kinds of fraud your company faces, how fraud happens, and tips on what you can do to prevent it. The three types of fraud are chargeback fraud, friendly fraud and true fraud.

Chargeback Fraud

Chargeback fraud is the fraudulent request for a return or refund in the form of a chargeback. The transaction is disputed by the cardholder in an attempt to regain the transaction dollar amount while retaining the product or services rendered. Chargeback fraud accounts for 35% of all fraud losses.

If that definition is a little too formal it is when someone is trying to take advantage of the chargeback process. They actually bought the product or received the service, but now they are just trying to get the money back by making false claims.

How It Happens

There are plenty of reasons why a customer could file a dispute and commit chargeback fraud. If you sell a product that can easily be sold on platforms like eBay or Craigslist you may experience a lot of chargeback fraud. The customer buys the product with the intention of disputing the charge and selling the product for a profit.

We took an in depth look at a customer feeling buyers remorse over golf clubs he bought in a previous post. He did not purchase the item with the intention to sell it or commit chargeback fraud. But buyers remorse can play a part in this type of fraud. If a customer made a splurge purchase or just isn’t using the product they may charge it back. In their mind it is a way around the return policy or explaining themselves to the merchant.

How To Prevent It

In this situation it is hard to stop a dispute from happening. The merchant could do every single thing right, but the customer is just going to dispute the charge anyway. The good news is that these type of disputes are winnable. By submitting a chargeback response with compelling evidence you can show that the customer is trying to take advantage of you and the chargeback process. To make a winning response you will want to make sure that you have all the evidence readily available. As well as checking that you are collecting all the necessary information during the check out and delivery process that is required by the card networks in your response.

For example, compelling evidence in a response for Visa Reason Code 10.4 on a physical goods transaction should include a delivery receipt. This evidence might include proof that the merchandise or services were available and the cardholder refused, or a waiver that proves that cardholder authorized delivery without a signature. Beyond the shipper tracking details, copies of delivery receipts or other confirmation of delivery. You will want this information available for when you need to create your response.

Friendly Fraud

Friendly fraud is an innocent act but it can cost merchants. While closely related to chargeback fraud, friendly fraud involves no malicious intent from the cardholder. Simple forgetfulness or family members making unknown purchases can be the root of friendly fraud. Something as simple as an unclear merchant descriptor can make a customer issue a chargeback for a purchase they actually made.

How It Happens

We have all had that mini heart attack looking over a credit card statement and seeing a charge you didn’t recognize. You have to sit there and rack your brain for what you bought. Then all of a sudden that new shirt you bought pops into your head and the panic subsides. Just a simple mistake like that can cause enough panic for a customer to dispute a charge.

How To Prevent It

Make things easy for your customer. Have an easy to understand merchant descriptor. It is a lot easier for them to try and remember what they purchased when they know what merchant the charge is from. Then if that still doesn’t jog their memory make sure it is easy for them to contact your customer service.

Beyond making things easy and clear for your customers, tools like Real-time Resolution are able to stop friendly fraud. Real-time Res provides issuers and cardholders with real-time order, usage, and delivery data. Reminding the customer of exactly what they bought before they ever start the dispute process.

True Fraud

True fraud, also known as identity theft, begins with an acceptance of a stolen card. The fraudulent purchase is disputed by the actual cardholder. As a result, the card account will be closed and a new account number and card will be issued to the true cardholder.

How It Happens

Fraudsters can get creative and innovative when they need to. With the adoption of EMV chip technology the fraudsters have move to targeting ecommerce. These true fraud cases can get complicated like triangle fraud or just as simple as a fraudster buying a card from the dark web and making a purchase with it.

How To Prevent It

Unfortunately you can not win a true fraud disputes. The only way to prevent true fraud is with fraud filters such as Feedzai, Sift Science, or Decision Manager. The filters are based on the customer information, transaction details, and your company or product type. Their purpose is to block fraudulent transactions from ever being processed but let the good and safe transactions through which prevents true fraud disputes from happening.