How to fight back against friendly fraud

Chargebacks are a hassle, a pain, a problem – whatever you want to call them. They cost the industry $31 billion a year – and that was a 2017 figure – with merchants bearing nearly two-thirds of these costs, according to Javelin Strategy & Research.

What’s particularly troubling is the growth of so-called ‘friendly fraud’, also known as first-party misuse or chargeback fraud. Nearly one-in-five consumers who have filed a chargeback have committed friendly fraud. One-in-ten consumers have done so on holiday purchases, says Sift, a fraud prevention company.

We explain what friendly fraud is, why it’s growing, how the card schemes are cracking down on it, and what acquirers, PSPs and merchants can do to benefit from the rule changes.

What is friendly fraud?

Friendly fraud is when a cardholder disputes a legitimate purchase with their issuer to get free goods. It includes customers refuting valid purchases, such as long-forgotten recurring subscriptions. Or when children are given access to their parents’ cards to make purchases with parental approval. Or when customers utilise chargeback rights if they are outside the return window for a refund from the merchant.

Chargebacks leave merchants out of pocket if they’ve shipped the goods or provided the service. They incur the administrative costs and hassle of dealing with the chargeback, irrespective of whether they win or lose the dispute. And friendly fraud stings all the more when their customer is behind it.

Estimates for the level of friendly fraud vary. 16% of fraudulent disputes could be attributed to friendly fraud, according to a Merchant Risk Council report of merchants globally published in May 2022. However, the 2021 Global Fraud Report from Cybersource found that nearly 40% of merchants worldwide were experiencing friendly fraud. The problem was particularly acute for merchants in North America and APAC, where reported incidence rates rose by 9% and 16% respectively, compared to 2019.

Friendly fraud is worse for merchants selling online or through mobile channels. 41% of their chargebacks are attributable to friendly fraud, compared to 35% for physical store-based merchants. In-app digital goods merchants have it harder still. Nearly half of the chargebacks they experience are thought to be the result of friendly fraud, according to a Javelin Strategy & Research study.

The situation could potential get worse. Peak season is approaching with ‘chargeback season’ following closely behind. 10% of chargeback disputers admit to friendly fraud during the holiday season, Sift says.

With a cost-of-living crisis underway, inflation rising and recession likely, consumer incomes are being squeezed. Left unchecked, friendly fraud could rise still further. This makes engaging with merchants to combat chargebacks, and friendly fraud in particular, even more important.

Card schemes tackle friendly fraud head-on

Merchants are always looking for ways to increase revenues, cut costs and improve their businesses. Proactively working with them to fight friendly fraud helps with all three objectives, as well as expands acquirer-merchant relationships.

It’s timely as the card schemes are introducing new rules to minimise friendly fraud. For example, Mastercard is introducing a pre-dispute or collaboration stage to prevent disputes from becoming chargebacks.

Consumers entirely bypass the merchant in 75% of fraud-related disputes, finds Javelin Strategy & Research

Cardholders typically contact their issuer instead of the merchant to dispute charges on their statement. However, as merchants hold the purchase details, issuers often lack the necessary information to adequately validate and resolve disputes quickly and efficiently.

Issuers will now have to file a collaboration request with Mastercard, prior to initiating a chargeback. Acquirers have 72 hours to respond to such a request before the dispute automatically becomes a formal chargeback. These Mastercard rule changes are planned for early next year.

Meanwhile, Visa is introducing new rules around ‘compelling evidence’ of cardholder participation, effective 15 April 2023. Merchants can provide details of a pattern of prior, legitimate transactions with a cardholder to protect themselves against false fraud claims. This includes core data elements such as user ID, IP address, shipping address and device ID.

72% of merchants and more than half (53%) of issuers believe that it’s too easy for customers to dispute transactions, finds Javelin Strategy & Research

For pre-arbitration attempts, acquirers can counter an issuer’s dispute by providing evidence of all the following:

• Merchandise or services were provided
• The same payment credential was used in two previous transactions that the issuer had not reported as fraud to Visa and that were processed more than 120 calendar days before the dispute processing date
• The device ID, device fingerprint of the IP address and an additional one or more of the following in both of the undisputed transactions are the same as the disputed transaction as applicable:

1. Customer account/login ID
2. Delivery address
3. Device ID/device fingerprint
4. IP address

How Web Shield can help

Web Shield has developed a plug-and-play chargeback management platform to help acquirers and PSPs to action and reply to collaboration requests before they automatically become chargebacks.

As Web Shield is an official Mastercard Collaboration Service Provider, our platform connects directly to Ethoca, a secure e-commerce fraud and chargeback protection company, and gives your merchants a way to review disputes for quicker resolution.

The Web Shield platform is quick, easy and free for customers to implement, with little to no development work. Get in touch for a presentation and to find out how easy it is to implement your own branded dispute resolution management platform. Or for advice on how you can use Visa compelling evidence changes to your advantage.