First-party misuse — known as “friendly” fraud — can be difficult to detect, and reducing it is a delicate matter of telling true policy abusers apart from innocent parties. Either way, it ends in chargebacks, extra costs and missing merchandise for merchants eating these losses.
It’s a problem that’s grown with the rise of eCommerce and restaurant delivery aggregators, reaching a point where friendly fraud is larger than the purely criminal variety.
Additionally, detection and prevention is being hampered by merchants stitching together different tools that lack integrated views of this illicit activity and are proving ineffective.
PYMNTS recently researched the issue in the study Dispute-Prevention Solutions: Third-Party Tools Limit Dispute-Related Losses, a collaboration with Verifi that surveyed over 300 merchants across four categories, which found that first-party misuse is now the top fraud concern of sellers.
We found that 61% of merchants dealt with customer disputes over card misuse by a member of the cardholder’s family, for example, leaving merchants with the tough decision of saying no to a good customer’s refund request because they claim they didn’t authorize a purchase.
That can be a costly judgement call, as allowing it incurs loss and denying claims can cost them otherwise good customers, who have many other options and may walk away.
Showing the complications, our study found that 54% of merchants “overidentify fraudulent disputes from family members attempting to make an unauthorized purchase, and 62% incorrectly flag customers’ disputes concerning a product that was never delivered as fraud.”
However, only 40% of merchants described their current dispute-management systems as “very” or “extremely” effective in detecting unauthorized purchases by family members.
Highlighting the extent of first-party misuse, commerce protection platform Signifyd announced in late May the launch of the Signifyd app for Stripe as part of the new Stripe App Marketplace, “providing instant chargeback claims insights directly through the Stripe Dashboard.”
“Overall fraud pressure — a measure of orders with sufficient red flags to be considered fraudulent — was more than 400% higher by the end of Q1 2022 than it was prior to the pandemic. And during the first quarter of 2022, consumer abuse was up more than 150% compared to pre-pandemic days,” according to Signifyd.
Bending ‘Zero Liability’ Rules
With friendly fraud ballooning during the 2021 winter gifting holidays and surging since, the National Retail Federation (NRF) is convening its NRFPROTECT 2022 event June 21-23 in Cleveland to rally behind upgrading approaches and systems to combat the pernicious problem.
In a Monday (June 13) blog post ahead of the event, NRF’s VP of Education Strategy Susan Reda said incidents of valid cardholders abusing “zero liability” rules of card networks is worsening “as consumers become more educated on how the rules work and the low risk level associated with it… Economic upheaval, such as significantly higher prices due to inflation, absolutely causes more friendly fraud.”
Speaking with PYMNTS in early June, Eric Kraus, VP and general manager of fraud, risk and compliance solutions at FIS, described different fraud types, such as refund fraud where refunded goods are never recovered by merchants, or otherwise good customers giving into bad impulses for a freebie.
He said merchants can fight this by keeping an eye on purchases “for attributes indicative of friendly fraud. Among the telltales: larger than normal or higher velocity purchases, especially with merchandise that is popular on reseller markets, should raise red flags for further review or investigation.”
Kraus told PYMNTS that processes to “track and monitor repeat offenders — creating a denial list that can be cross referenced before accepting a suspicious order” is one method in use, while behavioral analytics “can be instrumental in identifying suspicious patterns up front, if a merchant has a history of transactions with a consumer.”
Food delivery is another area where friendly fraud is taking a big bite. Here again, it can be hard to detect true fraudsters from errant customers getting whole meals refunded for minor complaints (e.g., “you forgot the hot sauce”), leaving restaurants holding the bag.
Jumio Chief Product Officer Bala Kumar told PYMNTS: “We’ve seen upwards of 18% to 22% of fraud tied to [the food delivery] sector. It’s no joke. It really comes back to what controls we have in place for preventing normal fraud and also for preventing friendly fraud, especially around family fraud, which is a big chunk of it.”
Against this backdrop, our research found that 77% of eCommerce merchants are investing in chargeback prevention strategies or plan to this year.
According to ‘Tackling The Chargeback Surge,’ a PYMNTS and Ethoca collaboration based on surveys of 3,557 consumers and 1,036 eCommerce retailers in three countries, “Most merchants intend to make outsourcing central to these strategies, with 52% of all surveyed merchants planning to tap third-party solution providers to aid their fight against chargebacks,” and 45% planning to outsource chargeback prevention entirely.
Get the study: Tackling The Chargeback Surge