Friendly Fraud Surpasses Criminal Fraud for Online Merchants

The ECB recently published its annual card fraud report for 2021 which shows CNP fraud at its lowest levels since records began and a 12% reduction on the previous year.

The report points to the implementation of strong customer authentication (SCA) under the revised PSD2, which suggests CNP fraud should now be even lower due to the staggered implementation of SCA across the EU bloc and as issuers globally are increasingly adopting revised 3DS 2.3 protocols.

However, this is not all good news. Merchants are still losing significant revenues from 3DS failure/drop-off due to the additional friction at the checkout. Whilst a targeted 3DS strategy can mitigate this to some extent, for example, through the use of exemptions and selectively challenging customers from outside the EU, online conversion still lags behind where it was before PSD2.

Additionally, data from Visa which suggests that up to 75% of chargebacks in 2022 were cases of first party misuse, rather than criminal fraud.

The reasons for this surge is several-fold. During Covid, merchants sought to quickly mobilise their online channels to avoid catastrophe. This included adopting generous return policies but also product handling and distribution resources were stretched to the limit. All of this made it easier for fraudsters to return counterfeit goods in place of the real thing (including the comical example of one customer returning a pristine iPhone box containing…. a potato!!); it also led to the rise of contactless home delivery, making it easier for customers to claim they never received the delivery, keeping both the goods and the refund.

Merchants need to consider shifting their focus on avoiding and defending disputes from friendly fraud. However, getting the balance is key… can you really afford to enact stricter return policies or are they simply a rising cost of doing business?

Prevention should be at the heart of effective chargeback management. Proper use of 3DS, address verification and fraud screening are tools all merchants should be using. Modern payment gateways such as Adyen or Stripe have built credible fraud prevention products, however, larger merchants with more complex requirements may benefit from dedicated services such as Forter or Signifyd.

When used correctly, fraud tools can also help to boost revenues by reducing false-positives and sending cleaner traffic to the issuing banks for authorisation.

Other actionable solutions include ensuring the transaction descriptor is clear as the number of customers who dispute a transaction because they don’t recognise the statement narrative is significant. Merchants can also refund some transactions (such as those with low value) before chargebacks are received to avoid fees.

One thing is for sure, life is getting harder for those managing payments and fraud. By taking a strategic and informed approach, the best-performing merchants don’t fear fraud but use online payments to sell more, grow more and build a strong reputation with both customers and banks.


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