The Rising Threat of Generative AI Fraud
Friendly Fraud 2.0: The Customer is No Longer Always Right
First-party misuse - aka “friendly fraud” even though we all know it’s far from friendly - has plagued merchants for well over a decade. The term friendly fraud became popular around the time of the financial crisis of 2008/9, when consumers were strapped for cash but wanted to continue buying the items and experiences they’d become accustomed to. Recently, friendly fraud has exploded, and fraud fighters everywhere are actively concerned.
2021 was the first time that the annual MRC global payments and fraud survey found that friendly fraud has become the top concern for merchants across industries and geographies. In 2022, the survey found that merchants believe an astonishing 16% of fraudulent disputes should be attributed to first-party misuse. Even more shocking, In some regions and sectors, merchant estimates for this figure ranged as high as 1 in 5.
To help fraud prevention professionals gain clarity and tips around this pressing problem, Identiq hosted a webinar in which Fraudology’s Karisse Hendrick and Identiq’s Uri Arad dove into the intricate challenge of first-party misuse - and what can be done to protect businesses from it. The flood of questions and comments showed how serious a concern this issue is for fraud fighters on the front lines.
This blog post pulls together some of the main topics and some highlights from the webinar. You can watch the whole thing here.
The Expanded Scope of Friendly Fraud
Part of the challenge is that consumers - and fraudsters - have expanded the scope of first-party misuse. Friendly fraud originally referred to chargebacks illegitimately issued by a consumer who changed their mind out of buyer’s remorse, or because they’d always planned to take the goods without paying. Now, though, first-party misuse is being used to include a wider range of costly bad consumer behavior, especially:
Family fraud. The internet has become such a fundamental part of the lives of teens and children that they don’t even think about it. Unfortunately, that lack of thought sometimes extends to payment methods. Parents who are surprised by unexpected payments made by their children, using their parents cards or accounts, sometimes groan and pay - but sometimes, they charge back.
Promo abuse. Once accepted as a marketing cost, worthwhile because of the value of promotional campaigns attracting new customers or encouraging loyalty or re-engagement in existing ones, the scale of promo abuse has spiked enough to make some companies question how much their business can - and should - bear.
Refund claims fraud. It’s not a matter of some customers cheating a bit on returns. Thanks to fraudsters specializing in return claims fraud, it’s become a flood. Participants in an Identiq roundtable focused on friendly fraud this year joked that in their offices, “INR” (Item Not Received) has become a curse word.
On top of this, chargeback fraud has increased as well. Consumers who were angered by restrictive refund policies during the pandemic discovered how easy it is to initiate a fraud chargeback without consequences - even when it’s fake. With economic downturn all around, many are putting this knowledge to use.
You Can’t Solve it in Silos
The problem of first-party misuse is real, costly, and unlikely to go away anytime soon. So what can fraud fighters do about it?
What you need to do will depend on the type of first-party misuse your business is seeing most of, how your fraud prevention framework is organized, the tools you use, your ability to dig into data which may be the responsibility of other departments (Marketing, for promotions, for example, or Customer Support for refunds), and so on.
It requires, in other words, a strategy. First-party misuse has become a serious drain on many companies’ resources, and tackling it effectively takes thought, analysis and collaboration across departments.
It’s not a problem that can be viewed solely on its own terms, either. You may decide to increase identity validation measures at signup, in order to cut down on promotion abuse. Alternatively, you may decide to keep signup a free-for-all, but be strict about how customer behavior impacts their ability to benefit from loyalty programs. You may be willing to increase chargebacks by no longer offering a refund program, or conversely become more relaxed about refunds to contain chargebacks.
Alongside all of this, though, what will be needed is a change of attitude - not just within the fraud prevention department, but company-wide. Helping your company achieve the necessary shift is a crucial part of fraud fighting in the current climate, even if it’s not something you have traditionally viewed as part of your role. The fact is, the customer is no longer always right.
The Customer is Not Always Right
It’s been a maxim for so long that it seems almost wrong to question whether the customer is right. The fact is, though, that when customers are trying to steal from your business at the scale at which chargeback fraud, promo abuse and refund claims abuse are occurring now - it’s time to question the things we previously took for granted.
Your organization might not like this. That’s why it’s crucial to present any suggested changes to policies as being all about the strength and growth of the business. This isn’t a fraud decision, even though it often ends in the lap of fraud fighters. It’s a business decision. What is your business really trying to achieve? What direction is it aiming to grow in? It needs policies that support those plans.
Some customers should get some leeway, because, yes, sometimes it’s your most enthusiastic customers who cheat on promotions to get more of what they love. What you need to be clear on is the value of each customer, and what your company expects to get from that relationship. That applies to chargeback fraud, promo abuse, and refund claims abuse.
Getting every department to act in sync on this important issue might take a lot of data diving, internal education, discussions and collaborative work. But it’ll be worth it.
Key takeaway: Phrase it right. Make sure you’re talking about aligning with company goals, boosting revenue and positioning the company correctly for the current economic climate.
- Don’t talk about adding friction; Talk about enabling increased approvals.
- Don’t talk about limiting the scope of a promotion; Talk about optimizing the promotion to hit its true goals.
- Don’t talk about refusing refunds; Talk about transparency around company policies, and customer education.
How to Fight First-Party Misuse: Highlights
The webinar was a mine of actionable information, so we’ll just pick out a few highlights here:
- Use your data. There’s a huge amount you can learn from chargebacks, promo stats and refund claims data. You need root cause analysis to work out where the problems are coming from, and which types of customer are causing them.
- Educate. The rest of the company may well not realize what’s happening. It’s on the fraud team to educate and explain.
- Strategize. First inside the fraud department, and then in collaboration with other departments. This needs data, analysis, and planning.
- Set parameters. Acceptable customer behavior needs to fit within parameters agreed by all the internal stakeholders.
- Know which ones to fight. You can’t fight, never mind win, them all. Make sure your company has clear policies around which chargebacks to fight - and how to do that to give you the best possible chance of winning.
- Collaborate. Between merchants, and between merchants and other parts of the payments and online ecosystem. Increased visibility into trends and even into specific customers’ patterns can be tremendously valuable.
- Advocacy. There are groups in the industry discussing the problem and representing the merchant point of view. If you have the resources, keep track of that. If you can, be part of it.
During the webinar, we received nearly 30 questions from the highly engaged audience, many of which we incorporated live into the discussion. It’s obviously a topic on many fraud fighters’ minds - and the webinar evidently resonated with them. Here are some of the goodbye messages people sent when we signed off:
Want to see what they loved so much? Watch it now.
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