PayThink

3-D secure can put a lid on friendly fraud

Register now

It’s no secret that e-commerce has risen since the global quarantine. Now more than ever, consumers are purchasing everything online, from groceries to electronics. It is imperative for the public to protect themselves and purchasing digitally has been a lifeline in doing so. E-commerce merchants are now ramping up fulfillment to meet with the high demand.

According to a recent article by MarketWatch, “One of the high points of Mastercard’s earnings call was the disclosure that card-not-present transactions accounted for 50% of volumes in April, up from 40% a year ago.” Thus, the e-commerce industry has reached its pinnacle. Given this massive shift, merchants are suddenly faced with a growing amount of fraud, primarily friendly fraud. According to data released by Chargebacks 911, 86% of fraud isn’t criminal ... it’s friendly.

Friendly fraud and chargeback fraud are virtually synonymous. In both cases, a legitimate cardholder makes an online purchase and calls back their bank claiming they didn’t authorize the transaction. It’s called friendly fraud because often the consumer is just confused or forgetful. On the other hand, chargeback fraud is done with malicious intent. Unfortunately, it's hard to differentiate between the two and the terms are now more like synonyms. In either instance, the bank will usually take the cardholder's word and initiate the chargeback process.

To combat friendly fraud, merchants are looking to fraud prevention tools such as 3-D secure. 3-D secure is a security protocol created by the card networks to protect merchants from routine chargeback fraud and friendly fraud. The solution uses metadata gathered from the cardholder's bank (IP address, device type, address, etc.) to authenticate the cardholder in real time when the transaction is taking place. Once the cardholder is verified, the liability for fraud is shifted from the business owner/merchant to the card issuer. All chargebacks that happen on “authenticated” cardholders go straight to the issuing bank and eliminate the time-consuming and costly chargeback process that would have otherwise been a burden to the merchant.

One of the most powerful things about 3-D secure is that it allows merchants to significantly reduce the number of false declines that occur. Once a transaction is authenticated, they don’t need to apply other fraud tools.

In an effort to prevent true fraud (someone stealing your credit card information and making a purchase you didn’t authorize) fraud prevention tools apply overly cautious algorithms that lead to false declines. A recent Aite report predicts losses due to false declines will reach $443 billion by 2021.

Fraud is inevitable for all merchants regardless of the economy. However, to stay agile during our new normal, gaining protection against true fraud, and friendly fraud in some capacity is key.

For reprint and licensing requests for this article, click here.