Rethinking friendly fraud in a digital age

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In the rising tide of e-commerce fraud, one of the trickiest areas to control is so-called friendly fraud, particularly within the growing markets for digital goods.

As digital-goods sales rise, consumers are making more calls to card issuers to dispute certain new—and seemingly unfamiliar—charges on their statements, driving up the number of chargebacks issuers must cover before investigating each one with the merchant, experts say.

“There’s been a sharp increase of friendly fraud in the last year or two, with consumers increasingly willing to dispute charges that in most cases they actually authorized directly or indirectly through a spouse or child,” said Keith Briscoe, chief marketing officer at Ethoca, which is developing a solution to tackle this breed of fraud.

While friendly fraud accounts for more than one in four chargebacks, digital goods are a growing source of this type of fraud, industry data suggests.

A tough problem is that many consumers honestly have no recollection of their approving purchases for mobile games or subscriptions until charges unexpectedly appear on their card statements, Briscoe said. Meanwhile, another segment of consumers is taking advantage of issuers' policies and demanding chargebacks for purchases they knowingly approved, he said.

“Friendly fraud in certain merchant segments is on track to become a massive problem as more people consume software, media, games and music through more devices and abusing behavior is driving more chargebacks,” he said.

Some of the larger-ticket examples of abusive transaction disputes include binge purchases of mobile app games or buyer's remorse associated with a major travel purchase, like a cruise or an airline ticket, Briscoe said.

To sort out the confusion, Toronto-based Ethoca is piloting a product called Eliminator, which uses APIs to quickly connect issuer and merchant systems to grab key transaction data. Issuers can use this data to resolve chargeback disputes with consumers on the spot.

“Through Eliminator, the bank can get additional transaction information in real time from the merchant, such as a digital receipt, or data that shows a pattern of frequent usage of a certain digital-goods platform, or prior purchases from that merchant, which can help the issuer explain to the customer why a transaction is legitimate, immediately ending the dispute,” Briscoe said.

The same information also helps issuers pinpoint actual fraud faster than the traditional approach, and it saves money by skipping the costly, time-consuming problem of restoring funds on a disputed transaction before an investigation can run its course.

Ethoca is trialing Eliminator with one bank and one major merchant in two ways: The issuer's customer service agents can use the tool to link to merchants' systems when a customer initiates a dispute via telephone, and customers can also access deeper merchant data on a disputed purchase within the financial institution's online banking channel or mobile app.

"The online approach … [prevents] calls from even coming into their call centers, which can be very costly," Briscoe said.

Certain digital goods merchants previously have said friendly fraud makes up as much as 75% of their card-not-present fraud, said Julie Conroy, research director with Aite Group.

"As recurring and subscription payment business models multiply, they will also be susceptible to higher than average levels of chargebacks," she said.

Ethoca's challenge in driving adoption of Eliminator will be getting both issuers and merchants to individually sign on, but there is mutual interest in collaborating to stamp out friendly fraud, Conroy said.

"Ethoca already has a robust network of issuers and merchants for their fraud alerts offering, so they already have a path to market penetration," she said.

Eliminator links to merchants' systems through an API integration that takes about two weeks to set up; banks receive it directly through a web portal. Ethoca is also making the service available to third-party providers of payment services and fraud management.

Tests so far show a 35% "deflection" rate on potential chargebacks, meaning that more than a third of incoming disputes were resolved with consumers on the spot and deflected so they did not result in chargebacks, according to Ethoca, which plans to move to roll Eliminator out fully in the second quarter of this year.

"These early results are very promising and we have a strong pipeline of global card issuers and merchants expecting to deploy this year," Briscoe said.

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