Some of the toughest types of payments fraud to combat aren't from an overseas hackers den but from everyday people misusing their own accounts or those of a relative, says Rick Lynch, Verifi's senior vice president of business development.
Verifi, which sells electronic payment and risk products for card-not-present transactions, and ReD, which offers fraud prevention services, have entered into an alliance that combines their expertise on different types of financial crime.
"ReD is more focused on criminal fraud, while we're more focused on 'family' fraud," Lynch says. Criminal fraud refers to organized efforts to infiltrate databases to steal card credentials, and "family" or "friendly" fraud cases are much subtler, such as when a person steals a relative's credit card or fraudulently requests a refund on a legitimate sale.
Verifi is adding its Cardholder Dispute Resolution Network (CDRN), chargeback and transaction data to the ReD Fraud Xchange. ReD will offer its clients access to Verifi's chargeback prevention services and Verifi will offer its clients ReDSheild, a fraud prevention platform that provides decisions about whether to accept, challenge or deny transactions.
Additionally, the two companies will co-develop new security products.
Combined, the two companies reach thousands of merchants who accept card-not-present transactions, including more than 50% of the Internet Retail 500 and merchants in specialized market segments.
Family fraud can be hard to spot because sometimes it's done by accident, Lynch says.
"Maybe a family member makes a purchase without you knowing about it, so you tell the card company that you didn't make that purchase and you get a chargeback. That can happen inadvertently, but it is still difficult for the merchant to manage," Lynch says.
The merchant can get hit with chargeback penalties or even a fine for the bad transaction, Lynch says. "It doesn't reflect well on business."
One example is an app, Lynch says. A parent may approve an app purchase by a child, but not realize the app, such as a game, has in-app purchase capabilitiesthe child can then make a purchase without the parent's permission or knowledge. The parent would later dispute the charge.
"It's a good consumer in good standing with a good card," Lynch says. "How can you know it's a bad purchase?"
This scenario played out so many times on Apple's iPhone and iPad devices that the technology giant had to refund $32 million to consumers as part of a recent settlement with the Federal Trade Commission.
There are also more "sinister" forms of fraud where a purchase made by a legitimate cardholder is disputed under false pretenses.
"From a merchant standpoint, it's hard for them to know if that's fraud, they don't have any information or easy behavioral evidence that this may be a fraudulent transaction," Lynch says.
Verifi works with issuers to engage merchants directly when a consumer complaint resembling family or friendly fraud arises to resolve the issue and avoid chargeback penalties for the merchant.
"Friendly fraud is notoriously difficult to spot, and it represents a significant problem for merchants," says Julie Conroy, a senior analyst at Aite Group.
Friendly fraud usually trends with the broader economy, but that's not the case in the current recovery, she says.
"As I've spoken with merchants, the market hasn't yet seen the usual dip as we ease into this recovery," Conroy says. "The prevailing thought is there are a number of opportunists that have realized this is a form of illicit financial gain without a lot in the way of consequences if you can get away with it."