Around $10bn lost to friendly fraud globally, versus an estimated $2bn to ID fraud!

By Monica Eaton-Cardone, CIO and Co-Founder of Global Risk Technologies

Successful merchants know where their money comes from and where it goes. They know the opportunities for the business and they know the risks. But how many merchants recognise that one of the biggest threats to their bottom line comes from an unlikely source?

The actions of the ‘ordinary’ consumer are causing bigger industry losses than identity fraudsters. ‘Friendly fraud’ has been growing 41% in recent years, costing over €10bn in industry losses, compared to around €2bn lost through ID fraud, according to Visa.  As ecommerce continues to grow at close to 20% per year in the EU, with total ecommerce revenues predicted to be €185.39bn for 2015, its vital merchants know about the risk, are able to identify it and can move quickly in order to mitigate the risk.

What is friendly fraud?

Friendly fraud is the hidden problem in ecommerce because merchants don’t often realise the extent of it and it is not typically carried out by criminal gangs, but by ordinary consumers. More and more customers are fraudulently claiming chargebacks on credit card transactions and merchants are bearing the brunt of it. The worry for merchants is that they often do not know about the problem until they get hit with a chargeback – 58% of cardholders do not contact the merchant at all but file the dispute directly with the bank.

This can happen accidentally if a consumer reports a charge because they didn’t realise another member of their household made the purchase, or if the charge information on their statement didn’t match up to a recognised retailer name. It can happen intentionally if a consumer receives the product they ordered yet claims to the bank that they did not, essentially gaining a free product.

Meanwhile the merchant gets hit by having to refund to the bank the value of the product in question. The merchant also loses the value of the product delivered and not returned from the consumer, as well as facing a fine from the bank and damage to credit ratings and potential loss to reputation.

One thing that will really shake up the industry globally is the US adopting EMV protocols. The big date is the liability shift on October 1^st 2015. From this date, any US merchant who is defrauded by card and is not using EMV protocols will have sole liability for that fraud.

What will this mean for the wider world of global payments? If the UK example is anything to go by, fraud won’t be going away. EMV is well established in the UK but card fraud figures continue to rise with £479m lost in 2014. Of this figure, £331.5m was for Card-Not-Present (CNP) fraud and, of this, £217.4m was via ecommerce. Put simply, when the one door is closed to fraudsters, they simply find other opportunities. In this case, that opportunity is CNP fraud.

5 simple steps to minimise the merchant risk

It is difficult to target or treat because the criminal in these cases is a consumer who is normally the least suspected, and protected behind an appearance of assumed innocence or even naive ignorance of the fact that there are gross consequences for their actions.

1. Employ best practices: Maintain delivery receipts wherever possible, clearly define your refund and cancellation policies, respond promptly to customer service queries and offer extended hours so your customers go to you first if they have a problem. A monthly newsletter can remind them that you are available to assist with any resolution they may require, which will help lessen the necessity for them to contact their bank.

2. Identify and tackle threats early: Risk mitigation services help predict threats and treat them before they harm revenues, growth, or profits. Maintain dynamic reporting on fraud metrics, transaction and issuer scoring and revenue predictions.

3. Dispute chargebacks with confidence: Recover lost revenue and restore tarnished reputations with tactical representation services that deliver results while helping to reduce future chargebacks.
4. Improve your customer service: Only 14% of customers contact the merchant before charging back. When the merchant is unaware of the chargeback, the merchant is unprepared, so make is easier for customers to get in contact with you. Monitor social media and track all customer interaction.

5. Balance security with customer experience: Security is a hygiene factor in online purchasing behaviour. Customers simply expect it. So be secure, but don’t let that security get in the way of a smooth and speedy customer experience.

Friendly fraud is a symptom of the digital entitlement age. People expect instant gratification and results and friendly fraud is part of that trend. Whether it is a legitimate or fraudulent claim, it is seen as an easy way to get money. Yet the elephant in the room is the seeming unwillingness of card schemes to tackle the problem.

The ideal solution is a comprehensive and highly scalable enterprise solution for chargeback compliance, risk mitigation, fraud management and merchant sustainability services to European acquirers, card issuers and local merchants.

Friendly fraud is not always caused by criminal or malicious intent, but that makes it all the more difficult for many merchants to track, analyse and resolve. It is important that merchants get the education they need on friendly fraud and how to combat it, which in turn should prompt education programmes for customers to help reduce the problem in the first place.