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The Post-EMV Friendly Fraud Epidemic

By Manav Gupta

Thursday, April 28, 2016

A recent report by CBS showed that 86 percent of consumer chargebacks are deliberate. This is a growing trend of friendly fraud—where consumers make a purchase online and then request a chargeback from the issuing bank after receiving the goods or services they ordered. Instances of friendly fraud tend to spike after data breaches—another high-frequency occurrence lately—as true fraud rises and consumers jump on the bandwagon to receive a refund from the merchant.

Friendly fraud has always been a problem for merchants, but with the liability shift in October of 2015, and the EMV migration slated to continue over the next few years, this type of fraud will escalate. In countries that have already migrated to the EMV standard, the uptick in fraud was palpable. The U.K. experienced a 62-percent increase in card-not-present (CNP) shoplifting after it implemented EMV in 2005. Experts predict the U.S. will see similar outcomes, and online merchants should be prepared.

CNP merchants now must navigate the threat of fraud from multiple angles. Online fraud is expected to more than double by 2018, increasing from $2.8 billion to more than $6.3 billion. Recent studies show that more consumers are turning to their mobile devices to make purchases, a prime channel for friendly fraud. Since 2011, friendly fraud has gone up 41 percent. These factors put CNP merchants in treacherous territory.


Matters are complicated by the lack of collaboration between merchants and issuers. Without real-time order detail information sharing between the two, issuers are not as equipped as they could be to resolve inquiries and disputes on the first call. This leads to spikes in operational costs for banks … and avoidable chargebacks for merchants. When merchants share order details with issuers, the inquiry or dispute can be quickly resolved—either validated as true fraud, which can then be relayed directly to the merchant to resolve and refund the cardholder, or challenged as friendly fraud, arming the issuer with information to stop bad actors in their tracks and eliminate "double dipping" and over-refunding.

The trend will only continue, and merchants need to have a friendly fraud prevention strategy in place to protect payments against unscrupulous consumers looking to game the system.

How Does Friendly Fraud Happen?

Friendly fraud is traditionally defined as a situation where a consumer uses his or her credit card to make a purchase and then disputes the transaction with the issuer once the item has been received, causing a chargeback. There are two main categories for friendly fraud:

* Deliberate – a method of getting products or services free

* Accidental – the customer does not recognize the charge on the card statement

Whether the friendly fraud is deliberate or accidental, the merchant is on the hook for both the cost of goods or services plus shipment costs and the fines and fees associated with the chargeback itself.


The fact is, convenience has become a driving factor for non-fraud consumer-initiated chargebacks. Eighty-six percent of the time, the consumer is bypassing the merchant because her or she claims it's easier than resolving the issue with the merchant. On the flip side, consumers are also fraudulently charging back orders that they did in fact receive, using the "I didn't buy that" or "I never received that" excuse as a reason to dispute the charge. Unfortunately, both fraud and non-fraud chargebacks cost merchants the same in fees and penalties, and both could potentially cost them processing privileges if their chargeback ratio breaks the acceptable threshold by the card brands.

Beating Friendly Fraud—Best Practices to Protect Payments

CNP merchants must remain vigilant against this costly type of fraud and develop their own action plan based on the current payments climate. A dynamic landscape means the best fraud prevention strategy will be comprehensive, yet agile. Layered tools and using multilayered authentication, biometrics and other emerging technologies can mean the difference between hundreds of thousands or even millions of dollars saved from fraud.

In a post-EMV environment, there is no single way for CNP merchants to confront every type of fraud scenario. So, implementing at least 2 of the following best practices can protect online businesses from friendly fraud.

* Authentication – From biometrics to one-time passwords to device fingerprinting authentication, this process validates both the legitimacy of the card and the identification of the consumer attempting to make a purchase.

* Address Verification Services (AVS) – This is a service provided by credit card companies and issuing banks to check submitted addresses against the address on file. It can indicate if a transaction is authentic or fraudulent.

* Tokenization – The card values are replaced with different values called tokens with this method. Data remains secure, and since the process includes the last four digits of the credit card, it can always be verified.

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About the Author:
Manav Gupta joined Verifi, Inc. in 2015 as Vice President of Issuer Products. Prior to joining Verifi, Manav was Director of Business Products at PayPal, responsible for the Resolutions and Protections platforms and the Voice of the Customer initiative.
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