Fraud from organized crime and hackers may attract the spotlight from payment companies and security vendors, but issuers and merchants consider friendly fraud the main nemesis.
Data sharing between issuers and merchants is gaining traction as a preventative measure in Europe, with fraud prevention specialist Ethoca reporting an information network has shaved about $100 million in fraud losses in the past year, while a collaboration with Santander has resulted in a 40% drop in chargeback volume.
Competitive companies are typically reluctant to share data, though Ethoca says it can stifle friendly fraud, traditionally the most difficult fraud to detect and stop because it essentially pits a cardholder's word against the merchant and bank.
The data sharing process begins with banks providing confirmed fraud data to Ethoca, which in turn delivers an Ethoca Alert with that information to the merchant when screening transactions. It makes it far easier for merchants to be alerted if a certain card number has been associated with friendly fraud incidents in the past.
"If the merchant is able to stop shipment of goods and perform a refund to satisfy the cardholder, then the bank does not need to process a chargeback to try to recover the funds," said Keith Briscoe, chief marketing officer at Toronto-based Ethoca.
Even better, a merchant can spend more time challenging the cardholder claims and denying the transaction prior to a shipment or refund need.
Investors have found Ethoca to be providing a unique service, as the company raised $45 million during a funding round in July of 2015 to bolster the growth of its fraud management platform to monitor chargebacks and help merchants make better decisions about accepting or denying transactions.As the company plots an international expansion, it plans to partner with a case management provider in the coming weeks to offer a plug-in service that allows merchants to receive the fraud data faster, thus avoiding even more shipment or chargeback incidents.
Also, a service provider for card issuing banks is planning to white label the Ethoca Alerts system for a one-click process that will allow banks to deal directly with processors, rather than working through Ethoca.
The timing of enhancements to Ethoca's platform will be good news for banks and merchants, as friendly fraud has reached new heights in certain channels, said Julie Conroy, research director and fraud expert with Boston-based Aite Group.
"Shared data can be beneficial in multiple fraud scenarios, and friendly fraud is no exception," Conroy said. "I've been hearing from e-commerce merchants in the app and gaming environment that friendly fraud is just going through the roof, representing as much as 75% of all their card-not-present chargebacks."
The subscription consumer packaged goods arena is also seeing "a big friendly fraud problem" with the boxes-of-the-month type of programs that everyone from grocers to clothes companies are trying to peddle, Conroy added.
"This magnitude is specific to these merchant categories, but highlights the significance of the problem," Conroy said.
Friendly fraud has not changed much over the past few years, other than more products and services have become easier to access digitally and then cardholders deny they made the purchase.
"Friendly fraud is multi-dimensional and common ones are buyer remorse, recurring billing, or the downloading of questionable content and someone denying to a family member they bought it," Briscoe said.
A child using a parent's account to buy games is common, but the parents will sometimes ask for a chargeback not knowing the child made the purchase, Briscoe added.
With all of the different variations of friendly fraud and chargebacks, including a consumer simply not being happy with a merchant's promise of what a product was supposed to be, banks are seeing between 60% and 80% of their fraud-related chargebacks resulting from friendly fraud claims, Briscoe said.
Banks are more easily able to spot those types of trends from certain cards, allowing merchants who can obtain that information to at least challenge the cardholder more fully regarding a chargeback request.
Banks absorb significant costs in the chargeback process, from employees taking calls to register the request, then providing a provisional credit on the account while communicating with the merchant that a chargeback is pending. After taking the request through a dispute process, the bank may also end up in an arbitration hearing. In the meantime, the merchant often loses the merchandise, pays the refund and absorbs any chargeback fees from the acquirer.
"We’ve seen with friendly fraud, a bunch of opportunistic fraudsters realize that this is easy money, and they expand their efforts," Conroy said.
As with other types of fraud, collaboration among issuers and merchants can help "nip this behavior in the bud, not only reducing the losses in the near term, but also dissuading friendly fraudsters from future attempts," she added.