While fraud has always been a facet of commerce, there is an emerging type of fraud that is on the rise and causing problems for everyone involved. With increasingly regularity, customers are misusing the chargeback system, and merchants and issuers are suffering as a result.
This type of fraud, known as friendly fraud, occurs when a customer denies having purchased an item and initiates the chargeback process – despite having actually bought the item or, in some cases, unaware a family member with access their payment credentials has made the purchase. Such fraud can occur by accident—the cardholder got confused by the merchant descriptor on the billing statement, for example—or because the customer has malicious motives.
In either case, once the chargeback is initiated, merchants and issuers often spend a lot of money resolving the complaint. “For every dollar that’s disputed, U.S. merchants and issuers actually incur $1.50 in chargeback costs,” said Aaron McPherson, vice president of Research Operations at Mercator Advisory Group.
With some estimates indicating that up to 50% of chargebacks with digital merchants are the result of friendly fraud, this is clearly a massive problem. And the problem will only get more pronounced as e-commerce continues to grow at an exponential pace.
To help merchants and issuers better understand the issues posed by friendly fraud, and what solutions are available to fight back, Mercator Advisory Group partnered with Mastercard and Ethoca to host a webinar on the topic.
The webinar featured McPherson of Mercator, Johan Gerber, executive vice president of Cyber Security Products at Mastercard, Keith Briscoe, chief marketing and product officer at Ethoca, and Anthony Macchia, director of Payments Operations at Synapse.
What’s driving the increase in friendly fraud?
There are two intertwined reasons why friendly fraud is getting worse. First, the volume of e-commerce sales is growing at an exponential rate and is expected to double over the next five years. With more activity occurring in the digital space, an increased number of chargebacks are being thrust into an ecosystem unequipped to deal with them.
Second, the chargeback dispute resolution process is flawed. “The chargeback process was never designed to be a notification mechanism,” said Briscoe. It can take weeks to determine if fraud actually occurred, meaning that when a customer is confused about a purchase and initiates a chargeback, that complaint is entering a system unequipped to respond effectively.
Instead, a system is needed that has real-time communication abilities to ensure complaints are handled expeditiously.
How is Mastercard’s Connected Intelligence strategy helping fight fraud?
To fight fraud occurring in digital channels, including friendly fraud, Mastercard is embracing a strategy called Connected Intelligence. Connected Intelligence seeks to reduce the amount of friction in the entire payments lifecycle by intelligently harnessing a myriad of data points to authenticate the user and approve a transaction.
From account creation to transaction approval, Mastercard’s strategy leverages intelligence at each point to make an informed determination of whether fraud is occurring.
When it comes friendly fraud, Mastercard is focused on three things:
- Moving dispute resolution upstream: When a customer is confused about a charge, the dispute is best resolved prior to the initiation of a chargeback.
- Enriching the data: To help inform confused customers, Mastercard and Ethoca seek to share more information about the purchase with the consumer, including the device used, the amount, and the merchant’s name.
- Scaling the solution: A better dispute resolution strategy will work best when it is used at scale by the entire payments ecosystem – and that includes card issuers, merchants, acquirers and supporting service providers that provide payment processing.
Ethoca’s industry-leading role in combatting friendly fraud
This is where Ethoca comes in. Ethoca was founded with the goal of bringing real-time communication capabilities to the dispute resolution space, eliminating the need for chargebacks while also reducing friction.
Ethoca’s dispute strategy can be distilled down to three areas, mirroring the pillars laid out by Mastercard:
- Ethoca Eliminator: This arms cardholders and issuer agents with detailed transaction information via digital banking application or call center channels – eliminating purchase confusion prior to the initiation of a chargeback.
- Ethoca Alerts: Provides merchants with advanced warning of fraud and customer disputes allowing them to take immediate action and resolve the issuer without the need for a chargeback, thereby reducing costs.
- Mastercom Collaboration: Ethoca and Mastercard have thousands of merchants and issuers working together and communicating in real time, bringing Ethoca’s fraud solutions to global scale.
Companies deploying Ethoca’s solutions have seen marked improvements. In a 12-month period spanning 2018 and 2019 Ethoca helped merchant and issuers to prevent over 6,000,000 chargebacks.
To learn more about friendly fraud and how Ethoca and Mastercard are working to stop it, you can access the webinar here.