Fighting Friendly Fraud: A Case Study

Friendly fraud is an enormous problem for retailers, expected to cost more than $25 billion per year by 2025, and growing at a rate of 41% year-over-year. Friendly fraud is first-party fraud, committed by customers that have purchased goods or services, who then file a fraudulent chargeback with their bank or credit card issuer to regain the amount that was paid.

First-party fraud can be managed by a retailer that monitors fraud and creates a policy of prohibiting customers that have committed friendly fraud from making additional purchases. However, first-party fraud is difficult to detect on the first occurrence, as it resembles a regular transaction until the fraudulent chargeback is filed.

Related reading: 3 Ecommerce Fraud Prevention Best Practices for Retailers

Banks, card issuers, and payment networks understand the scope and gravity of the friendly fraud problem; but they must balance the best interests of their card customers with the needs of retailers. Unfortunately, some bad actors are taking advantage of consumer protections to defraud merchants of revenues.

Leveraging Digital Forensics to Fight Friendly Fraud

Recently, key players in the payments landscape have moved to address friendly fraud by allowing a business to utilize digital forensics as “compelling evidence” to dispute chargeback fraud.

For an eCommerce transaction, these digital forensics include¹ data such as:

• Purchaser IP address
• Geographic location, time, and date of transaction
• Device ID
• Purchaser name / email linked by Merchant customer profile 
• Customer order history (including website interactions and previous purchases made with the same card as the disputed transaction)

Adaptive-ID: A Friendly Fraud Prevention Solution for Enterprise Retailers

At Precognitive, we put our pre-emptive fraud  protection solution to the test, using our proprietary technology to monitor digital forensics that are critical in the fight against friendly fraud.

First, we engaged Adaptive-ID, Precognitive’s device intelligence and identity linking solution. Adaptive-ID is a feature-rich and flexible product that can be used in various digital environments, building a consumer profile based on the device, or devices, that are used by that consumer. One of the Adaptive-ID features we used for our friendly fraud experiment is the solution’s ability to embed trackers in emails.

Related reading: What Your Employees Should Know About Phishing Scams

The client’s implementation of Adaptive-ID already included standard web and app software development kits (SDKs.) Their application was extended to embed the Precognitive tracker in outbound “no-reply” emails, including marketing emails, password resets, user registration confirmation and order confirmation. The extended implementation provided for a deeper examination of user engagement across multiple touchpoints.

As potentially fraudulent chargebacks began to roll through, the system began to analyze orders that had been approved as low-risk, but that had resulted in a “fraud” chargeback; an indicator of friendly fraud.

Here is a sanitized visual for sharing:  

This chart illustrates that: 

• The user receives or reads a marketing email – we’ve now created a link between a consumer’s email and their device.
• We have also linked a semi-static residential IP address to the consumer data, confirming the email is accessed from that IP. This information is significant, particularly if  the same IP was used to submit the order that was later disputed.
• If the user returns to the site with the same device and conducts a second transaction that is later charged back to the bank. The merchant then has significant proof, under digital forensics, that the chargeback constitutes friendly fraud.
• For additional security, Precognitive can tie in user visits and transactions  from other devices linked to the residential IP address, and can confirm if the device is located near the consumer’s address.

This evidence, gathered by Precognitive’s Adaptive-ID technology, allows the merchant to build a compelling case to dispute a chargeback that constitutes friendly fraud. While this approach does not capture every instance of friendly fraud, it provides a tool for merchants to fight back against payment fraud, and create a template for addressing friendly fraud in the future.

Is your business encountering problems with friendly fraud? Contact Precognitive today to learn how Adaptive-ID, along with our behavioral analytics and decision engine solutions can help you stop fraud before it starts; and help you dispute fraudulent charges when they occur.

Our Sources:
[1] https://www.emarketer.com/content/holiday-shopping-2019