How to Avoid the Repercussions of “Friendly Fraud”

Friendly fraud is on the rise, now accounting for up to 75% of all chargebacks. From instances of kids using their parents’ cards to purchase items to flat-out falsification to reverse an overspend, friendly fraud occurs when a cardholder disputes a legitimate transaction as fraud with the hope of having those funds returned.

“This is becoming really costly for all issuers,” C.J. Littrell, executive vice president and chief operating officer at TCM Bank, N.A., ICBA Bancard’s wholly-owned credit card-issuing bank, recently shared during an ICBA LIVE session. “[Customers] have buyers’ remorse or they have given their card information to someone in their family, and they’ve gone out and done something really ridiculous, and now they’re coming in and saying, ‘Hey, this is incorrect.’”

In some instances, community banks may be responsible for making their customers whole, but first, they need to confirm the veracity of the claim by focusing on uncovering the facts. The following steps will support community banks in avoiding the repercussions of friendly fraud:

• Help your customer differentiate between a dispute and fraud. In instances of fraud, customer card information was used without their permission. In a dispute, customers may have authorized the transaction or use of their card, but they never got the goods or services, or they weren’t what was expected, and they want the money returned. These distinctions affect who bears the liability—the card issuer or the merchant.

• Deliver clear and transparent transaction information in online and mobile banking. Sometimes fraud claims stem from a rogue descriptor in online or mobile banking. Think about produce purchased at a local farmers market: That vendor may have a doing-business-as (DBA) name that doesn’t match how the customer knows them, and the customer may not recognize the purchase. The more information banks can provide around the transaction, including a mapped location, the less chance there will be of inaccurate fraud claims. Third-party providers have solutions that can help in this effort.

• Lean on authorities to substantiate the fraud claim. If a card issuer has doubts about the veracity of a presented claim of fraud from a customer, they can ask for (but not require) a police report or indicate that they will file a police report as part of their fraud claim process. Involving the authorities creates a record of the incident, including customer declarations affirming that the transaction is fraudulent that may deter friendly fraud and help banks recover funds not eligible for chargeback via network rules.

• Keep in mind Visa’s new Compelling Evidence Rule and how it supports fact-based decisioning. This rule, which just went into effect, allows “merchants to present additional information or information that was previously not accepted in order to identify friendly fraud,” Rebecca Kruse, ICBA Bancard executive vice president and chief operating officer shared at ICBA LIVE. She explained, “Say, I’ve had my Netflix account since 2010, and all of a sudden, I’m starting to dispute my Netflix charges, and I say that it’s fraud. They can prove that I’ve logged into that account, that I’ve had it established for over 10 years, I have the same IP address and Mac address, and that’s a way merchants will dispute friendly fraud.”

While friendly fraud is on the rise —more than 25% of consumers have acknowledged filing such claims—by remaining vigilant and taking necessary steps to manage their liability community banks can reduce these occurrences, and ultimately, lower overall costs and create a more secure payments infrastructure.

For more information about fraud trends and new mitigation efforts, read the latest issue of Bancard Confidential.