The holiday season can be a joyous and profitable time of year for merchants. But, if merchants do not take a proactive approach to protecting their enterprise against fraud, they could find themselves struggling to keep up with ongoing challenges. Although fraud is repeatedly characterized as simply a cost of doing business, the attitude and approach toward fraud should not be carelessly indifferent. Taking this approach will only lead to financial complications and stress.
In a recent PaymentsJournal podcast, Amanda Mickleburgh, Director of Merchant Fraud Product and MRC Board Member at ACI Worldwide, and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, dive into what the fraud landscape looks like, what strategies merchants can implement to mitigate fraud, and how ACI can help merchants tackle fraud head-on.
Holiday Season Expectations Amid Fraud Challenges
As merchants gear up for another holiday season, more challenges are on the horizon that need to be addressed to ensure a more profitable and successful period. With a potential surge of transaction volumes comes the inevitable increased risk of fraud. Surprisingly, much of the fraud can be traced back to merchants’ own customers, many of whom initiate chargebacks after buying and receiving goods, as one example.
“We’re seeing an increased prevalence of friendly fraud,” Mickleburgh said. “If you looked at the top 10 fraud typologies, you’ve got the perfect storm of synthetic identity fraud being used to create accounts.
“But then equally, you’ve got genuine customers who are committing friendly fraud, possibly as a result of some of the economic challenges that we’re seeing in the industry.”
Adding complexity to the mix are the many alternative payment methods. Consumer payment preferences have increased, and as a result, it’s crucial that merchants enable a successful checkout. The fact that the payment journey is no longer linear adds to the challenge.
Mickleburgh emphasizes the need for merchants to get up to speed on new consumer buying behaviors. Although the pandemic did have some influence on consumers’ buying preferences, consumers still want a faster checkout experience, with little to no friction. It’s all the more reason to have a way of authenticating the digital identity of customers, to mitigate the potential for friendly and synthetic fraud.
Without digital identification authentication tools, Mickleburgh says, businesses will open themselves up to more fraud or will incur more costs by declining authentic customers.
“The holidays always exacerbate existing issues,” Keyes said. “I think merchants and merchant service providers often want to put their head down and get through the holidays, make a lot of sales, and figure out issues later.
“But you can’t do that with friendly fraud, going into the holidays, because they’re only going to pick up. There’s going to be more and more of them, and you can’t just cover your eyes. You need to have a plan for all these different issues, especially friendly fraud.”
Unmasking the Unfriendly Face of Friendly Fraud
Although friendly fraud can come in multiple forms, Mickleburgh mentioned that as many as 30 different types of friendly fraud are committed by genuine customers. She then zeroed in on the one that is most prevalent. The most common friendly fraud she sees is when genuine customers are making purchases and deciding that they don’t wish to pay for them.
They might claim that the item never arrived and ask for another item. Or they received the item, and they were not pleased with it, requesting a chargeback and claiming they didn’t initiate the purchase, even though the retailer holds evidence that they were the actual customer.
She also mentioned refund and return abuse. This occurs when customers do not return the actual item but replace it with another item. When a return is initiated, the merchant issues the refund back to the customer’s card. However, once the merchant receives the return, it discovers that either the correct item was not returned or it was damaged upon return.
To combat friendly fraud chargebacks, Visa has stepped in, implementing the CE (Compelling Evidence) 3.0 Initiative in an effort to lower chargeback cases for merchants. These new guidelines provide a list of compelling evidence that merchants can use to challenge an invalid customer dispute. Some evidence that can be submitted includes IP addresses and device IDs.
“Friendly fraud has increased significantly,” Mickleburgh said. “According to CapitalOne’s latest research, it was around $85 billion U.S. at the end of 2022, and we are expecting that over 10% of returns within most merchants globally are fraudulent ones. This isn’t a problem that’s going to go away.
“The more mitigating steps and the more consideration that merchants place on understanding their returns and refund data, the better. Quite often, there is a disconnect between the front-end sale and the refund and return that occurs in the background quite often because they’re different teams.”
Said Keyes: “There are many kinds of friendly fraud, which means that there’s not just one problem you’re facing as a merchant and also not just one solution to it. It’s a lot of different areas to consider
“There’s not just one Band-Aid you put on this. It’s a complicated issue with complicated solutions as well.”
Network Intelligence is Key
There is no one magic bullet that can prevent all incidences of fraud. However, there are strategies that businesses can employ to ensure that, when they do confront fraud, they have a fighting chance to mitigate the damage.
Mickleburgh says that it’s all about the data.
“Taking a look beyond the checkout phase is key,” she said. “There’s a ton of data that happens before it gets to checkout. Behavioral analytics is a really important part of the process. Understanding the navigational behavior of that consumer. But again, if it’s a genuine consumer, that’s going to check out fine, invariably.
“So utilizing that returns and refund knowledge that’s been gleaned from previous transactions, making sure that there’s nothing obvious that could be changed in that internal process at the front end.
“There’s also the benefit of things like network intelligence. These are pools of information that is held from a number of different customers and merchants. It’s all anonymously pulled but contains data that relates to known previous frauds that can be a really beneficial snapshot of data that can add to that front-end checkout. Because if it’s happened before somewhere else, there’s a high chance that it could affect the merchant today.”
The objective, Keyes said, is to be precise in targeting instances of fraud.
“The tools help a lot in making sure you are not just pointing at your customers randomly and offending people who are not committing any kind of fraud,” he said. “There’s a different weight to it sometimes than other types of fraud because you are policing your own customers in a way that you are not always, which doesn’t mean that you shouldn’t do it. It just means it requires some additional thought and care as you go through the process.”
There is No Silver Bullet
Much of the industry continues to claim that there is only one solution, a silver bullet of sorts, that can forever put fraud to rest. But Mickleburgh says there is no such thing. What’s available, she says, is a host of tools and technologies that can be used together to create a custom fraud orchestration that can benefit the merchant, based on its geographic location, its product sets, and the payment method used.
With this in place, the merchant would be freed up, enabling the tools and technologies to do all the heavy lifting, and thus fully optimizing the merchant’s revenue channels.
“What you really need to be doing is curating, understanding the data, understanding the problem that you’re trying to fix, and then using the tools that you have within that orchestration layer to effectively mitigate fraud, but most importantly optimize revenue, manage out cost,” Mickleburgh said. “And that is not a one-size-fits-all offering.
“It’s important to remember that not only is there not a silver bullet, the solutions that are available are not going to prevent friendly fraud from occurring in the first place in all cases.
“You can obviously limit it, and you should try to, but you not only need to limit it, you need to prepare to combat it after it occurs. It’s part of doing business as a merchant that there’s going to be all kinds of fraud.”
Safeguarding Revenue with ACI’s Digital Identity
One thing ACI does not do is introduce clients to the latest and greatest shiny new fraud tools to haphazardly throw at the problem and hope for the best. It’s all about clearly identifying the issue, followed by an appropriate plan of action.
“It really is for us about making sure that when we form a relationship with a new merchant that we understand the problem we’re trying to fix first and then collaboratively have alignment over how we want that strategy to evolve and what the focus areas of that strategy needs to be,” Mickleburgh said.
ACI’s digital identity services can empower your payments strategies with an AI-augment fraud engine that decisions transactions in real-time. Utilizing over 10,000 data points including device ID, behavioral analytics, and geographic location, organizations can stop fraudsters and bad actors looking to partake in friendly fraud, with integrated network intelligence that shares intel across payment methods, channels, and borders to keep your revenue intact.
