Visa Wants to Eliminate Friendly Fraud Without Alienating Honest Consumers

Friendly fraud is a bit of a misnomer; first-party card misuse would be more accurate.

That’s because, just like other types of fraud and cybercrime, friendly fraud is anything but friendly.

And with more people conducting transactions online and purchasing digital goods, the opportunities for friendly fraud have expanded.

“As merchants look at [friendly fraud], they’re seeing it become a bigger part of their overall costs,” Mike Lemberger, senior vice president, regional risk officer for North America at Visa, told PYMNTS CEO Karen Webster.

One type of friendly fraud encompasses situations where disputes arise due to misunderstandings or buyer’s remorse, with individuals taking advantage of zero-liability policies to obtain refunds.

But there is also a more malicious form of friendly fraud, where individuals intentionally make purchases with the intent of disputing them and getting their money back.

“Friendly fraud can eat into not just a dollar amount but also an operational cost amount to merchants, where if you’re a small business and you’re focusing more time on figuring out how to investigate [friendly fraud], working with your acquirer and your payment facilitator, that is lost time spent away from your business,” Lemberger said.

That’s why helping merchants to safeguard against these risks while ensuring seamless digital payments has never been more crucial.

Introducing Solutions to Identify and Mitigate Fraud

Lemberger said that seasonality plays a role, and higher instances of friendly fraud during peak shopping periods like the holidays. Additionally, macroeconomic factors can contribute to an increase in fraud, as individuals facing financial pressures may resort to fraudulent activities.

Merchants are taking proactive steps to combat and protect themselves from financial losses due to friendly fraud, which can be categorized into three vectors: innocent disputes arising from confusion, consumer frustration and buyer’s remorse, and intentional exploitation of the system for fraudulent purchases. It is difficult for merchants to accurately identify first-party card misuse spurred by malintent versus above-board refunds.

“It gets down to really identifying where the fraud is entering the ecosystem,” Lemberger said, noting that the more data available, the easier it is to identify the root causes of fraud.

Merchants are also increasingly adopting more restrictive return policies, narrowing return windows, and implementing costs for returning items as measures aimed toward reducing the operational costs associated with investigating and resolving disputes, he added.

Machine learning and artificial intelligence (AI)-based scoring systems can also help merchants distinguish between legitimate disputes and fraudulent activities and assess the likelihood of winning a dispute.

The Role of Data Sharing and Security Measures

Accurately identifying first-party misuse can be challenging, and Lemberger said tactics including data sharing and the use of compelling evidence are becoming increasingly crucial in combating friendly fraud.

By sharing information about transactions, including device binding, IP addresses and visual evidence like pictures of deliveries, merchants and payment networks can build stronger cases against fraudulent activities.

Tokenization and other security measures also play a role in protecting against friendly fraud, Lemberger added.

“There might be a little bit of added investment [from merchants] in integrating some more tools, but in the end, you have to balance that against what protections you’re getting,” he said.

By reducing friendly fraud, the industry can allocate resources more effectively to resolve legitimate disputes and provide better customer service experiences. But it remains important for merchants not to go too overboard when battening down the hatches against friendly fraud.

Creating a friction-full process for purchase disputes can leave a bad taste in the mouths of honest consumers who made a simple mistake and just want their money back.

“It can get very frustrating, particularly in cases where it truly is a dispute,” Lemberger said. “There is a balance going on right now in the industry, and a lot of it comes down to investment.”

The focus for the future, he added, includes enhancing compelling evidence capabilities, implementing machine learning and AI-based scoring systems and improving data sharing among industry participants. By reducing friendly fraud, the industry can allocate resources more effectively to resolve legitimate disputes and provide better customer service experiences.

“It’s all in the spirit of getting the fraudsters out of the system,” Lemberger said. “But it takes an ecosystem, it takes time, and it takes investment to get there. The innovations already exist, and a lot comes down to implementation and priorities.”