Incidents of so-called “friendly” fraud have surged in the past several years, resulting in significant losses for merchants and creating persistent challenges for financial institutions. In fact, of the merchants surveyed by Digital Commerce 360 and Chargebacks911® for the 2023 Chargeback Field Report, 74% of those that track friendly fraud reported an increase over the past three years, with the average rise being 19%.
The dramatic increase in e-commerce and other card-not-present transaction activity has fueled much of this increase. But thanks to new approaches, screening and detection methods, issuers have the tools to fight back.
Friendly fraud, also known as family fraud, typically occurs when a cardholder disputes a purchase on their statement and claims it is fraudulent, even though they or a household member might have legitimately made the purchase and received the goods. Whether prompted by buyer’s remorse, a dispute over a merchant’s return policy or malicious intent, friendly fraud cases are challenging for merchants and issuers.
“Friendly fraud is one of the most difficult fraud patterns to identify,” said Russell Brown, Senior Manager, Fraud Operations Strategy at PULSE®. As a result, issuers find these incidents often need to be handled on a case-by-case basis.
Careful analytics are critical to mitigating friendly fraud incidents – especially screening transaction data, which can provide insights into individual cardholder behavior. Friendly fraud prevention strategies can also benefit from agile, customized methodologies that can change depending on the needs of a particular issuer.
Steps to minimize the impact of friendly fraud
Issuers can use a combination of proactive solutions to prevent and minimize the impact of friendly fraud cases. In some instances, early detection can stop the incident entirely.
“If we can detect it prior to authorization or purchase completion, then the chargeback never takes place,” Brown said.
In essence, once an issuer suspects they are dealing with a friendly fraud case, they can take steps to identify and halt the activity before it becomes a processed transaction. “We encourage issuers to go back and look at historic transactions for the card,” Brown said.
With data in hand, the issuer can look for:
- Anomalous or outlier activity. For instance, if a cardholder’s transaction history typically shows one or two monthly transactions for one merchant, but suddenly shows 10 or 12 transactions, it might be a sign of fraudulent activity.
- Unusual behaviors or patterns of activity. Is there a history of disputed transactions, or is there an established relationship with the merchant, without any previous disputes?
Patterns that veer from a cardholder’s historic behavior or differ from the average cardholder may reveal areas that need to be scrutinized, Brown explained, perhaps with the help of the merchant. After analyzing and reviewing unusual activity, issuers can choose to verify the transaction with the customer.
With a customized approach, issuers can implement optimal solutions
Identifying demographics can help issuers implement a successful fraud detection and prevention strategy. For example, the PULSE DebitProtect® platform allows issuers to develop fraud rules that consider local or individual demographics or regional purchasing patterns. A military issuer, for example, might have different usage patterns, including many international transactions, compared with a local community credit union for a teachers association.
Risk tolerance can be another important factor when developing a fraud detection strategy. “We recognize that each issuer has their own school of thought when it comes to risk tolerance and customer service,” Brown said. “There is often a balance to determine how best to detect fraud while minimizing good-customer impact.”
An issuer that is risk-averse, for example, might want to implement a fraud rule strategy that blocks transactions after a single card reaches a $500 daily limit, especially in a card-not-present environment.
DebitProtect® also monitors what would be historically normal or unusual for a specific customer. Then, when anomalies occur – including sudden, unusually high spending – the alert system can help prevent transactions that might later be disputed.
When a possibly risky transaction is reported in the DebitProtect® system, the issuer receives an alert, indicating that a transaction was approved or that a case was created. Then the issuer has access to a 90-day transaction history to help them analyze spend and behavior patterns for the impacted account.
In addition, with the DebitProtect® Authorization Blocking service, each issuer has a one-to-one relationship with a fraud analyst who works with them to create rules that are optimal for their institution.
Using a combination of fraud-detection approaches, including the analysis of cardholder-behavior data, issuers can develop a methodology that can lessen the occurrence and impact of friendly fraud and similar activities.