How fintech can help card issuers prevent friendly fraud
Friendly fraud is a complex and challenging problem within the payments industry. This means that a cardholder identifies a purchase as fraudulent and raises a dispute, when the transaction was actually carried out by the cardholder or people close to the cardholder (e.g. partner). With the ongoing rise of e-commerce – this costly and time-consuming “cry wolf” scenario will continue to put pressure on issuers.
Solving the problem requires an understanding of the cause. Friendly fraud is often the result of transaction confusion, with consumers not recognizing a legitimate purchase from the information displayed about the transaction. This can happen when there is a difference between the name of the customer-facing brand and the retailer’s registered name with the payment network. As a result, the transaction cannot be identified, leading to customers raising disputes about purchases that they have made but do not now recognize. The absence of other identifiers such as logos on banking applications also causes transaction confusion as it withholds additional identifiers from the consumer.
Another problem is first-party fraud, which is a subset of friendly fraud. This means that an authorized user – such as someone’s teenage child – makes a purchase without the cardholder’s knowledge. This leads to the cardholder raising a dispute about a transaction that they themselves have not carried out, but their household has received the goods/services that have been purchased and therefore the cardholder is responsible for the purchase.
Issuers have two ways to combat friendly fraud: challenging cardholders in disputes likely to be caused by friendly fraud and increasing the detail of transaction data.
Challenge cardholders in disputes
Cardholders have become accustomed to the comprehensive fraud protection offered by card issuers and regularly exercise their rights for fraud disputes. Being able to dispute legitimate transactions without being challenged leads to a higher incidence of friendly fraud disputes.
Issuers that challenge cardholders when friendly fraud indicators are associated with a transaction help them avoid the costs associated with initiating a chargeback and the operational costs of the likely challenge from the acquiring bank. Using indicators from transaction data, such as a history of purchases from the merchant or the type of transaction (purchasing a physical item is less likely to be fraudulent) increases the accuracy of these challenges.
Although offering a friendly dispute process (for example, using a user-friendly cardholder self-service chatbot) may encourage more use of the card (by providing reassurance that if something happens, the cardholder can easily raise a dispute), is the imperative to challenge disputes about legitimate transactions, which harm the entire payment ecosystem.
Increase the detail of transaction data
A major cause of friendly fraud is transaction confusion due to a lack of merchant information appearing in the transaction data. This problem is best avoided by increasing the quality and quantity of data displayed with each transaction in an easy-to-understand format and language.
Thanks to payment innovation, issuers can now incorporate more detailed data from merchants using a variety of platforms – some of which have been acquired by major card payment network companies. They include fintechs like Verifi, now owned by Visa, which helps reduce chargebacks, and Ethoca, a Mastercard-acquired company that offers near-real-time sharing of dispute data and purchase details between financial institutions and merchants.
By integrating one of these types of platforms, issuers can display information such as the merchant’s logo, the merchant’s address, and even an alternate merchant name. Each of these additional pieces of information helps build a much clearer understanding of the transaction for the cardholder, resulting in a reduction in the frequency of transaction confusion. Verifi and Ethoca, for selected merchants, also provide digital receipts that describe the goods/services offered and help cardholders recognize the purchase. This enables card issuers to raise a more comprehensive challenge to friendly fraud disputes – thereby helping to resolve disputes in a timely manner.
How fintech can help issuers
Issuers can invest time and resources in improving their systems to detect friendly fraud, reduce operational costs and offer a better cardholder experience to cardholders. However, a simpler and faster approach is to use off-the-shelf solutions offered by fintech innovators focused on tackling challenges in the fraud and dispute domain.
About the author: Fatemeh Nikayin is Co-founder of Rivero – a privately owned company based in Switzerland, with a strong focus on simplifying card payment operations. Rivero delivers SaaS solutions for all players in the card payment ecosystem such as issuers, acquirers, BaaS and FinTechs. With Kajo, Rivero simplifies the process of navigating current and upcoming regulatory compliance obligations, and with Amiko, he provides a solution to manage fraud recovery processes and resulting disputes.
