My colleague Doug King recently penned a call to action in a Take On Payments post on friendly fraud. That post was the first we'd written about this issue in more than four years. But the feedback we received about the post echoed our concern that these disputes are becoming more frequent and expanding into new scenarios that clearly indicate that, at least to the merchant community, this type of fraud is anything but friendly.
Further research into this problem indicates a range of reasons for a cardholder to dispute a transaction. The spectrum runs from a well-intentioned misunderstanding to a premeditated effort to avoid paying for the goods or services. Below are some common friendly fraud scenarios.
Merchant description or error: A cardholder may be confused when a company descriptor in the transaction detail does not match the company name they are familiar with, so disputes a legitimate transaction. Sometimes this happens, as Doug described in his post, if a parent company name is used rather than the d/b/a name, which frequently occurs with online international transactions. Or sometimes the final transaction amount differs from the amount the cardholder thought he or she was supposed to pay because, for example, there was a miscalculation of sales tax or delivery charges. In most cases, the cardholder, upon seeing all the transaction details, remembers the transaction and withdraws the dispute.
Family usage: Family members sometimes use another family member's payment card without permission. For example, a child might use a parent's card to purchase online gaming credits or features, or a sibling might purchase gasoline, clothing, or something else. With ecommerce transactions, many merchants resort to "electronic fingerprinting" of the device used in the transaction to capture the device ID, IP address, and other details for further documentation. Hopefully, with this additional information provided to the cardholder, the cardholder will do some detective work to determine if the transaction should be honored.
Refunds or buyer's remorse: A cardholder with second thoughts about a nonrefundable purchase might deny that they made the transaction—perhaps a store's return policy deadline has passed or the cardholder just doesn't want the trouble of going through the refund process. To help combat this type of chargeback, the card brands all have "compelling evidence" chargeback documentation rules. These rules allow the merchant to provide additional documentation for certain disputes proving that the cardholder either participated in the transaction, actually received the goods or services, or benefited from the transaction. Merchants must be selective about which of these disputes to contest, depending on the transaction amount, the availability of supplemental evidence, and resource costs to collect and provide such evidence.
Criminal theft: A cardholder who understands the chargeback regulations may use them against a merchant, having purchased an item or service with no intention of making payment. The cardholder may falsely claim that goods were never delivered. Some colleagues and I recently spoke with a business owner who operates several casual dining restaurants. Because of a technology interoperability issue with the restaurant management software, the restaurant has not been able to implement EMV chip readers. The owner said that some patrons became aware of the absence of these readers and spread the word to others, to the point that the losses have become significant. Because of the EMV chip liability shift rules, the owner is considered noncompliant and has no defense against the chargebacks.
All these types of friendly fraud are almost impossible to detect upfront, especially those toward the more benign end of the range. For a merchant, having reasonable return policies and fully disclosing them and hiring exceptional customer service representatives will take them a long way with some of the disputes. But to defend themselves from the determined criminal, merchants' or card issuers' only recourse may be keeping a file listing cardholder accounts suspected of repeated friendly fraud claims.
What techniques do you think are most effective in combatting friendly fraud?
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed