The rise of eCommerce has given way to a new set of customer expectations. It’s a lot easier for people to get away with “fraud” aka stealing. Behavior that is not tolerated in the brick and mortar world suddenly becomes a grey area online and businesses are suffering.

In mainstream news, there is a lot of attention to fraud & protecting consumers. We commonly hear stories about “True Fraud” (Stolen identities/credit cards)...But what about all the consumers that are frauding merchants?

This blog post is about friendly fraud, the sneakiest-of-all-chargebacks that are crippling chargeback rates globally.

Friendly Fraud = Honest Mistake

A customer who commits friendly fraud isn’t a criminal. Instead, the friendly fraudster is likely confused, misguided, or even forgetful. Customers who commit friendly fraud do so as the result of an honest mistake.

For subscription merchants, this usually manifests in customers who legitimately agreed to recurring billing, but were genuinely unaware of what they were agreeing to. No matter how many fail-safes and opt-ins your business uses, there will always be a customer who overlooks the terms of an agreement.

Chargeback Fraud = Malicious Intent

Customers who commit chargeback fraud are a threat to your business. These are purposeful and malicious attempts to steal from you. They are dishonest and deceitful. For example, someone orders a couch online and then they call their credit card company and claim they didn’t order it. This happens, and in most cases, the consumer ends up keeping the product because it’s more of a hassle for the merchant to take the product back. Chargeback fraud is essentially online shoplifting.

The Biggest Problem….And The Solution

It’s virtually impossible to differentiate between “Friendly Fraud” and “Chargeback Fraud”.

In both cases, it’s a legitimate cardholder making a legitimate purchase. There is no way any algorithm can prevent it because the frauding doesn’t happen until after the transaction has taken place.

When a legitimate cardholder makes a purchase online for a product or service with their credit card and then contacts their credit card issuer to dispute the charge, the issuer will (usually) take the word of the cardholder and mark the transaction as fraudulent. And that’s how the time-consuming and costly chargeback process begins. Unfortunately, friendly fraud rates are only continuing to grow. In fact, they now account for 90% of all fraud in industries like digital goods.

Some might say the credit card companies aren’t doing their part to protect business owners from modern-day “theft”...but that isn’t entirely true. There is a solution.

The Solution

EMV 3-D Secure is a security protocol created by the card networks to protect merchants from chargeback fraud & friendly fraud. How it works is actually quite simple. The solution uses metadata gathered from the cardholder's bank (IP address, device type, address, etc.) to authenticate the cardholder in real-time when the transaction is taking place. Once the cardholder is verified, the liability for fraud is shifted off the business owner/merchant and onto the card issuer. All chargebacks that happen on “authenticated” cardholders go straight to the issuing bank and eliminate the time-consuming and costly chargeback process that would have otherwise been a burden to the merchant.

To learn more about how 3-D Secure works, chat with a PAAY representative today!