Mobile Order Ahead

Deep Dive: How QSRs Can Fight The Rise Of App-Enabled Friendly Fraud

Many consumers are still hesitant to dine out during the pandemic, but a growing number are warming to delivery and carryout options.

One recent study estimated that roughly 44 million Americans would tap food delivery apps by the end of this year, up from 38 million in 2019, and another survey predicted that the number of smartphone delivery app users will climb 25.2 percent to 45.6 million this year. That total is predicted to decline to 44.1 million in 2021 as dining spaces reopen but is eventually expected to rebound to 53.9 million in 2023.

QSRs that offer mobile order-ahead options as well as convenient online ordering methods are expanding their sales significantly through these digital channels during the pandemic. The growth in digital transactions is also spurring a boost in friendly fraud, which occurs when legitimate customers either knowingly or unwittingly claim that they did not make legitimate purchases and seek reimbursement for them.

The following Deep Dive examines how the increased use of mobile apps has led to a rise in friendly fraud as well as how fraud detection tools can help identify and mitigate these problems. It also analyzes how focusing on the customer experience can help prevent such fraud in the first place.

How Friendly Fraud Develops

Friendly fraud begins when consumers request chargebacks from their financial institutions (FIs), claiming that certain transactions were fraudulent or that their orders never arrived. Banks typically then reverse these transactions, reimbursing customers without ever requiring them to contact the restaurant — even though eateries are usually left footing the bill.

Some dishonest customers request refunds even though they have received and consumed their meals or realized that family members have purposefully or accidentally used their cards to make food purchases. Neither banks nor restaurants are obligated to offer refunds in these instances, which can lead unscrupulous consumers to place false chargeback claims with their banks. Most FIs cannot readily verify these claims and ultimately authorize the requests to maintain smooth customer relations, leaving restaurants on the hook.

Friendly fraud has also been on the rise because many customers now need only to tap their mobile apps to dispute charges, and fighting chargebacks by proving payments are valid can be cumbersome and costly for restaurant operators. One recent study reported that chargebacks rose 179 percent in the past two years. Such chargebacks are predicted to total approximately $40 billion before 2025. Another report noted that 1 percent of customer payments were lost to chargebacks, which could be a massive problem for eateries operating on slim margins.

How QSRs Can Fight Back Against Friendly Fraud

Approximately 40 percent of consumers state that complicated login methods requiring many steps when placing food orders are the top cause of frustration they face when ordering online or through mobile apps. Restaurants thus need to invest in robust fraud prevention measures that can tackle the issue of chargebacks without putting off legitimate customers. Security tools can include existing information such as card verification values, for example, which cannot be housed on restaurants’ systems and are therefore unlikely to land in fraudsters’ hands. Address verification systems can also add a layer of protection by matching consumers’ credit card billing addresses with those on file at banks.

Advanced technologies such as artificial intelligence (AI) and machine learning (ML) are powerful tools that can help restaurants quickly sort through large volumes of payment data for signs of fraud that human analysts might miss. Such processes can also add protection by analyzing real-time data about transactions and reaching out to customers to verify their payment details, simultaneously confirming accuracy and determining that select transactions are authorized. Such actions could provide just enough friction to keep customers from filing false chargebacks.

The mobile order-ahead space is unlikely to rid itself of friendly fraud anytime soon, especially as more consumers flock to mobile ordering channels during the pandemic. Restaurants can mitigate the issue, however, by leveraging the right tools when analyzing transactions and by providing just the right amount of friction.

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