September 27, 2016
Luke Reynolds, Featurespace Fraud Director, explores the impact of over-sensitive fraud systems on costs of fraud management and the negative impact it has on customer relationships.

How can a merchant tell when a genuine customer isn’t being genuine?

‘Friendly’ fraud is estimated to be responsible for a higher percentage of chargebacks than criminal fraud

It’s a tough world out there for merchants. Card transaction fees have been rising, customers demand 24/7 support services and easy refund processes – not to mention the pressure and scrutiny merchants are placed under following data breaches. And now they have to handle ‘friendly’ fraud attacks.

How can fraud be described as ‘friendly’? Well, when it is your own customers committing the fraud.

Surprisingly, merchants are often under fraud attacks from their own customers. ‘Friendly’ fraud, as it is often known, is first-party fraud – when a genuine cardholder disputes legitimate transactions on their credit or debit cards.

Some merchants are seeing it as the fastest-growing area of fraud for their business, and the impact on chargeback fees and other refund costs is causing significant damage to merchant revenue.

How do customers commit ‘friendly’ fraud?

The highest levels of ‘friendly’ fraud tend to be seen in digital goods and luxury items, purchased online – laptops, tablets, designer handbags and jewellery. The customer either sees an opportunity to avoid paying – by claiming the items were never delivered – or a family member has used a credit or debit card without asking the cardholder’s permission.

“Buyer’s remorse” can also be a factor – that feeling we all have after making an impulse purchase.  The majority of us, of course, return the item, rather than claiming never to have made the purchase in the first place. But many don’t.

What’s the impact on chargebacks and revenue?

It’s estimated that friendly fraud is responsible for a higher percentage of chargebacks than criminal fraud.  Chargebacks raise operational costs for merchants if they are issued directly to the customer. However, even more likely is that the cardholder goes directly to their card issuers to get an immediate refund – resulting in additional fines for the merchant, as well as the loss of revenue from goods that don’t get returned.

So how can merchants take steps to protect themselves?

The reality for merchants is that friendly fraud is difficult to detect as these transactions do not fit the typical fraud pattern. It is fraud committed by a customer acting in a genuine way – and it’s always uncomfortable to challenge your own customers with a fraud accusation.

Directing customers to extra authentication steps, such as 3DS, can certainly help mitigate risk, but it’s not going to outsmart the risk of friendly fraud.

The key is to identify what is normal and what is anomalous – or uncharacteristic – behaviour, even within the profile of a genuine customer.

Most approaches to behavioural analytics focus entirely on whether or not the person is who they say they are. A different approach is to enable merchants and card issuers to understand the behaviour of individuals, and detect when a customer may be starting to change their behaviour in subtle ways.

Featurespace’s ARIC engine is a software platform that uses real-time, adaptive behavioural analytics to understand the behaviour of each individual customer, building a profile of their normal patterns of behaviour.

Understanding customer interactions online

The ARIC platform captures user behaviour via multiple inputs, including web browser content on both desktop and mobile devices, as well as activity from within apps. By analysing every stage of each customer’s interaction during an online purchase, you can ‘risk score’ their activity, including against their own previous behaviour.

So ARIC is able to detect the subtle change in behaviour that can indicate a chargeback request is actually a case of friendly fraud.

ARIC’s link analysis feature also enables merchants to investigate trends in chargeback claims – for example common links between the types of goods that receive chargeback requests, or identifying multiple requests from similar delivery locations.

The impact for merchants is significant – for one large UK merchant, ARIC reduced chargebacks by over 54%, dramatically improving revenue.

Key takeaways

  • Merchants are suffering ‘friendly’ fraud attacks from genuine customers disputing legitimate transactions
  • Friendly – or first-party fraud – is one of the fastest-growing areas of fraud for many global merchants
  • The ARIC platform is making it possible for merchants to profile anomalies within an individual customer’s behaviour profile and reduce chargebacks by over 54%