Over the last several decades, issuers and card networks have worked hard to educate consumers on a single point: If a fraudster steals their card number (or physical card) and goes on a spending spree, they as customers will not take the financial hit. All they have to do is call their issuer, report a charge on their billing statement that wasn’t theirs, and their bank will more likely than not instantly refund the money to the card and formally begin an investigation.
And the investigation, Kount Chief Customer Experience Officer Rich Stuppy told PYMNTS, is almost always going to end with a chargeback to the merchant.
That is more or less as it should be. If customers believed that anytime their card was used as a tool by a criminal to finance some fancy electronics — they wouldn’t use cards. Cash may be limiting, but a thief can’t possibly steal more of it than a customer has on them — whereas with a card with a big enough line of credit, there could be life savings-draining damage in a few swipes, dips or taps.
The problem, Stuppy explained, is that criminal fraud — hackers swiping card numbers and the like — isn’t the only type of fraud that merchants face. There is also friendly fraud — when a customer calls in and reports a transaction as fraudulent when it isn’t, and they are actually the person responsible for the charge.
Sometimes that friendly fraud is the result of a simple mistake on the consumer’s part — the way the charge shows up on their bill reads oddly so the customer doesn’t recognize what it is and reports it.
Sometimes the customer is correct in identifying they aren’t the person who made the charge, not realizing that it came from someone in their household; as in the case of the kid who borrows mom’s card to make some Fortnite investments.
But sometimes the fraud is not the result of a sincere mistake, but of consumer training gone a bit awry.
“More and more, consumers have been trained if they want something for free, they can call the bank and know that the bank’s ideal customer experience is to take the dispute at face value and file it as such, at which point it is almost certain to become a chargeback to the merchant,” he said.
And as merchants have gotten more effective at catching and repelling criminal fraud, he noted, they are seeing the balance of the fraudulent chargebacks they’re being hit by coming from “friendly” sources. It is a problem, he said, that has hit quick-service restaurants (QSRs) particularly hard as of late — and the balance of cases aren’t consumers who are mistaken; they are people looking to get a free lunch, literally.
Friday Night Fraud Parties
Friendly fraud schemes in the QSR space, Stuppy noted, have a curious tendency to be contagious in a way they aren’t in other places. A friendly fraud tactic appears one day, and then seems to spread virally within a local area. And basically, he said, the idea is to use the contours of the chargeback system to buy a group of individuals a few free meals.
“Imagine on Friday we are having a house party, so someone buys the pizza for the gang, and then later calls up and charges back the order,” Stuppy said. “The next Friday night comes, and it is another guest’s turn to call in the order — and then charge it back a few days later. This can persist for weeks.”
He noted that pizza is an easy go-to example, but some variation on these eat-for-free schemes can be made to work whenever food is ordered along digital channels.
And while the merchant handing out food for free that they should be getting paid for is the most directly hurt in this equation, the issuing banks are also being hit with cost. They have to process and route all these chargebacks — which adds to their operational costs.
Plus, Stuppy noted, this is a growing form of fraud. People are increasingly able to convince themselves that participating in these large-scale free food schemes is somehow not theft — and the numbers of attempts and clusters of friendly frauds they are seeing is on the increase.
“Merchants that don’t have sophisticated anti-fraud systems will start out with something like 50 percent criminal fraud, 40 percent friendly fraud and about 10 percent that is an error or a problem in their system,” he said. “Once they put in a more sophisticated system, the pie gets smaller, the criminal fraud goes down, and the proportion of friendly fraud shoots up. It can be 60 percent to 80 percent of the frauds are now friendly.”
None of this, he said, is great news. But, the friendly fraud story for QSRs and merchants trying to fight this battle isn’t entirely negative either. Awareness of the problem is increasing, as are the techniques and tools for pushing back on it.
Changing the Perception
The customer who calls in a fake chargeback probably would be unlikely to rob a pizza parlor or attempt to steal a pizza out of the oven. They are also probably unlikely to attempt to shoplift in a physical store. Why so much moral flexibility? Said simply, according to Stuppy, it’s really both very easy and consequence-free to attempt friendly fraud. More likely than not they are going to succeed at netting an ill-gotten gain, and even if they don’t, nothing bad will happen to them.
Consumers don’t steal in stores because they’ve been trained to believe that cameras on the ceiling and staff people are watching them. They know that trying and failing to steal in real-world transactions can land you in jail — and that their behavior is, in fact, being watched.
Consumers likely need similar expectations in the digital world and when dealing with things like chargebacks.
But merchants can start changing those expectations. They can track consumer behavior patterns, spot the outbreaks of chargeback fraud, and cut them off by directly addressing the groups perpetrating it. There are also improved tools, like Kount’s recently released Friendly Fraud Solution featuring Visa Merchant Purchase Inquiry (VMPI) that provides data in real time about the transaction to the issuing bank, Stuppy explains.
“That means the issuing bank can push back when a customer calls in by verifying the information, such as it came from this account number, this address, etc. — are you sure it isn’t yours?”
Just that little bit of friction can really cause people who have been trained to think they can get it for free to immediately stop — and decide they might want to be honest and pay for their pizza. Or, it can help jog the memory of someone who may have simply forgotten the order or misread the billing descriptor.
Friendly fraudsters usually aren’t career criminals. Sometimes they are merely mistaken, and even when they are trying to get away with something, Stuppy said, it often doesn’t take much to deter them from that course. Merchants and issuers, he said, just have to be willing to add in a little bit of fruitful friction to fight friendly fraud.