Friendly fraudsters — those who scam banks by disputing legitimate payments on their own accounts — are causing enough stress that Visa and merchant groups are joining forces to spot illicit chargebacks earlier and with greater ease.
"First-party fraud has become a serious financial burden for merchants and small businesses, ultimately impacting their profits and bottom line," said Mike Lemberger, senior vice president and chief risk officer for North America at Visa.
Visa is partnering with the Merchant Risk Council and Merchant Advisory Group as part of an update of the card brand's dispute program. The update, which will go into effect on April 15, 2023, will allow the merchants to provide more data in an effort to cancel disputes that result from fraud from the actual consumer, often referred to as first-party fraud or friendly fraud. Without these updates, the merchant can struggle to find enough evidence to prove a case of friendly fraud.
The cooperation comes as merchants and card brands have spent the past few years battling over fees, a
"When it comes to payment-related topics, merchants and financial institutions are usually on opposite sides," said David Mattei, strategic advisor for Aite-Novarica Group.
But first-party fraud has been an issue for years and is a source of frustration for merchants when they are held liable for a chargeback even when they have evidence a legitimate cardholder performed the transaction, Mattei said.
There is a critical mass of first-party or friendly fraud. The digital security firm
The pandemic brought a flood of digital transactions to Visa's network. Fraudsters tried to take advantage, but "It’s my team’s job to be a step ahead of the bad guys," said Kelly, the card network's global head of risk strategy.
Sift's survey covered more than 34,000 sites and apps.
"With this change by Visa, there is a formal mechanism for the sharing of data between the merchant and the financial institution so that the financial institution is armed with strong evidence to refute a dispute by unscrupulous cardholders," Mattei said.
The updates are still underway, though the plan is to include data such as reuse of payment credentials, common login information for different payments, proof that a purchased product was used and other information that suggests a pattern of activity at the same merchant by the same person.
"This is a step forward as it allows merchants to submit information like device ID, delivered address or verified login in order to prove customer identity," said John Drechny, CEO of the Merchant Advisory Group.
For a merchant to win a chargeback dispute under current rules when first-party fraud is suspected, the merchant is required to produce compelling evidence, such as a customer using a social media post to show off an item they claim to have never received, according to Drechny. The new rule changes and Visa initiative provide more options for merchants to show evidence of the consumer's culpability.
But there are still instances of fraud this system may not be equipped to catch, according to Drechny.
"There is still more work to do on this subject, as this really covers the situation in which a consumer has an ongoing relationship with the merchant and does not cover when the same issue occurs from a newer consumer," Drechny said.
This rule change will provide additional protections for the entire payments ecosystem, Lemberger said, adding it would create more efficient and accurate standards to investigate dispute claims to protect the ecosystem against fraud, and would reinforce proper classification of dispute claims to reduce associated dispute costs and eliminate undue burden in the ecosystem.
"And for issuers, with the updates we made, we’re creating more efficiencies in the ecosystem with the goal of eliminating as many fraud threats as we can," Lemberger said.
Friendly fraud is often hard to spot because the transactions are legitimate–they don't involve an account takeover, phishing or some other hack. The consumers also often dispute only a portion of a larger shopping card, making it more difficult to ferret out the legitimacy of the dispute, according to Fraud.net.
"Friendly fraud requires a correlation of data between the cardholder and merchant, and in turn the merchant shares that data with the issuer," Lemberger said. "Data exchange is key to spotting first-party misuse, but without an industry standard on what types and how data can be exchanged, it is hard to pinpoint what disputes are valid or invalid."
The pandemic-era shift to digital payments and e-commerce adds another challenge to spotting and preventing friendly fraud. Writing for
"As e-commerce shopping continues to flourish and more payments are made digitally, there are more opportunities for first-party misuse to arise, from an unrecognized gaming purchase to a forgotten recurring subscription purchase," Lemberger said.
