Friendly Fraud
Encyclopedia
Friendly fraud, also known as friendly fraud chargeback
, is a credit card
industry term used to describe a consumer who makes an Internet
purchase with his/her own credit card and then issues a chargeback through his/her card provider after receiving the goods or services. When a chargeback occurs, the merchant will always be responsible, regardless of what they did to verify the transaction. The challenge with friendly fraud is that there is no way to verify the authenticity of the transaction, which is in fact legitimate, because the consumer is the one that is not legitimate.
.
MasterCard was sued in 2003 by an internet vendor for having credit card policies and fees that have made internet vendors especially vulnerable targets of friendly fraud. Internet vendors typically have to pay much of the losses when a fraudulent transaction like friendly fraud occurs.
on the credit card to fight "Card absent environment" chargebacks. These are the three digit codes on the backs of Visa, Mastercard
, and Discover
cards, and the four digit code on the front of American Express
cards.
and gambling
websites. Attempts by the merchant to prove that the consumer received the purchased goods or services are difficult. Again, the use of card security codes can show that the cardholder was present, but does not prove that delivery was made. Proof of delivery is often difficult, and the cardholder gets the product without paying for it.
One method of combating friendly fraud is to create a feature in the product that checks in with the merchant's database. If a chargeback is issued, the merchant can tell the product to suspend service. This tactic will also work for digital subscription services, or any other online product that requires updates or logins. Unfortunately, however, the merchant will usually still be charged a fee for incurring a chargeback, so this is not a complete solution.
. To help eliminate call center purchase chargebacks, call centers are working to make the purchases more like "card present" purchases.
When consumers walk into a store and buy something, they typically swipe their credit cards, confirm the purchase amount, sign their name and leave with the merchandise. This is a "card is present" purchase and fraudulent chargebacks in these situations are almost non-existent.
Agent-assisted automation
technology is available for call centers that allows customers to enter their credit card information, including the card security code
directly into the Customer Relationship Management
software without the agent ever seeing or hearing it. The agent remains on the phone, so there is no awkward transfer to an Interactive Voice Response
system. All the agent can hear is monotones. This is the "card present" equivalent of "swiping" the card.
Before the purchase is submitted by the agent, the purchase amount is played back to the consumer along with the last four digits of the card. The consumer is asked to confirm their purchase by providing a verbal signature, which is recorded.
Finally, an email is sent to the consumer with the purchase information and an attached audio file of their verbal signature.
By more closely mimicking the "card present" process, MOTO merchants have been able to reduce the incidence of chargebacks. Moreover, this process has resulted in merchants being able to consistently overturn the chargebacks the consumers do try to fraudulently push through.
Chargeback
A chargeback is the return of funds to a consumer, forcibly initiated by the consumer's issuing bank. Specifically, it is the reversal of a prior outbound transfer of funds from a consumer's bank account, line of credit, or credit card....
, is a credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
industry term used to describe a consumer who makes an Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
purchase with his/her own credit card and then issues a chargeback through his/her card provider after receiving the goods or services. When a chargeback occurs, the merchant will always be responsible, regardless of what they did to verify the transaction. The challenge with friendly fraud is that there is no way to verify the authenticity of the transaction, which is in fact legitimate, because the consumer is the one that is not legitimate.
History
Friendly fraud has been widespread on the internet, affecting both the sale of physical products and digital transactions. To combat digital transaction fraud, prepaid cards have been offered as an effective alternative to ensure customer payment. South Korean software developers such as Nexon implemented a prepaid system in 2007 to combat friendly fraud, selling prepaid cards in stores such as TargetTarget Corporation
Target Corporation, doing business as Target, is an American retailing company headquartered in Minneapolis, Minnesota. It is the second-largest discount retailer in the United States, behind Walmart. The company is ranked at number 33 on the Fortune 500 and is a component of the Standard & Poor's...
.
MasterCard was sued in 2003 by an internet vendor for having credit card policies and fees that have made internet vendors especially vulnerable targets of friendly fraud. Internet vendors typically have to pay much of the losses when a fraudulent transaction like friendly fraud occurs.
Physical products
The online merchant that sells physical products can protect itself by requiring a signature upon delivery of goods. That signature, in addition to information gathered online, helps in the resolution of chargeback disputes. Also, the merchant can request the Card Security CodeCard security code
The card security code , sometimes called Card Verification Data , Card Verification Value , Card Verification Value Code , Card Verification Code , Verification Code , or Card Code Verification are different terms for security features for credit or debit card...
on the credit card to fight "Card absent environment" chargebacks. These are the three digit codes on the backs of Visa, Mastercard
MasterCard
Mastercard Incorporated or MasterCard Worldwide is an American multinational financial services corporation with its headquarters in the MasterCard International Global Headquarters, Purchase, Harrison, New York, United States...
, and Discover
Discover Card
The Discover Card is a major credit card, issued primarily in the United States. It was originally introduced by Sears in 1985, and was part of Dean Witter, and then Morgan Stanley, until 2007, when Discover Financial Services became an independent company. Novus, a major processing center, used to...
cards, and the four digit code on the front of American Express
American Express
American Express Company or AmEx, is an American multinational financial services corporation headquartered in Three World Financial Center, Manhattan, New York City, New York, United States. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best...
cards.
Digital transactions
Friendly fraud thrives in the digital products market where it is much easier for fraudsters to succeed. Common targets include pornographyPornography
Pornography or porn is the explicit portrayal of sexual subject matter for the purposes of sexual arousal and erotic satisfaction.Pornography may use any of a variety of media, ranging from books, magazines, postcards, photos, sculpture, drawing, painting, animation, sound recording, film, video,...
and gambling
Gambling
Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods...
websites. Attempts by the merchant to prove that the consumer received the purchased goods or services are difficult. Again, the use of card security codes can show that the cardholder was present, but does not prove that delivery was made. Proof of delivery is often difficult, and the cardholder gets the product without paying for it.
One method of combating friendly fraud is to create a feature in the product that checks in with the merchant's database. If a chargeback is issued, the merchant can tell the product to suspend service. This tactic will also work for digital subscription services, or any other online product that requires updates or logins. Unfortunately, however, the merchant will usually still be charged a fee for incurring a chargeback, so this is not a complete solution.
Call Center Transactions
Another common channel for chargebacks is Mail Order/Telephone Order (MOTO) payment processing through a call center. In this case, as with the two others listed here, the main problem is that this is a card not present transactionCard not present transaction
A card not present transaction is a credit card purchase made over the telephone or over the Internet where the physical card has not been swiped into a reader. It is a major route for credit card fraud. If a fraudulent transaction is reported, the bank that hosted the merchant account that...
. To help eliminate call center purchase chargebacks, call centers are working to make the purchases more like "card present" purchases.
When consumers walk into a store and buy something, they typically swipe their credit cards, confirm the purchase amount, sign their name and leave with the merchandise. This is a "card is present" purchase and fraudulent chargebacks in these situations are almost non-existent.
Agent-assisted automation
Agent-assisted automation
Agent-assisted automation is a type of call center technology that automates elements of 1) what the call center agent does with their desktop tools and/or 2) says to customers during the call...
technology is available for call centers that allows customers to enter their credit card information, including the card security code
Card security code
The card security code , sometimes called Card Verification Data , Card Verification Value , Card Verification Value Code , Card Verification Code , Verification Code , or Card Code Verification are different terms for security features for credit or debit card...
directly into the Customer Relationship Management
Customer relationship management
Customer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
software without the agent ever seeing or hearing it. The agent remains on the phone, so there is no awkward transfer to an Interactive Voice Response
Interactive voice response
Interactive voice response is a technology that allows a computer to interact with humans through the use of voice and DTMF keypad inputs....
system. All the agent can hear is monotones. This is the "card present" equivalent of "swiping" the card.
Before the purchase is submitted by the agent, the purchase amount is played back to the consumer along with the last four digits of the card. The consumer is asked to confirm their purchase by providing a verbal signature, which is recorded.
Finally, an email is sent to the consumer with the purchase information and an attached audio file of their verbal signature.
By more closely mimicking the "card present" process, MOTO merchants have been able to reduce the incidence of chargebacks. Moreover, this process has resulted in merchants being able to consistently overturn the chargebacks the consumers do try to fraudulently push through.