What is it and what can be done about it

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Julie Fergerson, CEO of Merchant Risk Consultinghas over 25 years of experience in the development and promotion of Internet-based technologies.

As e-commerce continues to grow, online shoppers are becoming more aware of how to protect themselves. Customers are learning that precautions such as complex passwords, two-factor authentication, and biometric identification can go a long way to frustrating fraudsters.

But what happens when it is the customer himself who commits fraud?

Welcome to first party abuse, often referred to as friendly and abusive fraud. It is a complex and widespread form of fraud that is committed by customers every day, on a staggering scale.

What is Friendly Fraud/First Party Abuse?

First-party abuse occurs when a customer makes an online purchase, whether for physical or digital goods, and then initiates a chargeback after receiving those goods. The complexity of first-party misuse stems from the difficulty in determining whether the chargeback request was legitimate or fraudulent.

Let us illustrate with examples:

A parent gives his phone to his child to play a game. The child intentionally or unintentionally uses the credit card linked to the phone to purchase high value game items without parental consent. The parent sees the transactions, gets upset and disputes the purchases when they were made legitimately.

Consider a more malicious example: a customer orders a pair of shoes from a merchant, claims they never received the delivery, and initiates a chargeback, fully intending to keep the item.

Identifying first-party misuse can be difficult for a merchant, as it is difficult to determine customer intent. This is especially difficult when the trader has so few options for recourse.

Regulations such as the Fair Credit Billing Act of 1974 were designed to protect customers, but now it is difficult for merchants to dispute fraudulent transactions. Nearly 50-year-old regulation is ill-equipped to mediate modern e-commerce transactions, and such rules have resulted in regulatory loopholes that facilitate higher volumes of first-party abuse.

The cost of first party misuse

These illegitimate conflicts are both extremely costly and surprisingly frequent.

According to the Merchant Risk Council’s latest Global Fraud and Payments report, surveyed merchants attribute 16% of fraudulent disputes to first-party misuse, with 61% of those disputes being an attempt to obtain goods or services free. In a survey, nearly one in five consumers (17%) who filed a chargeback dispute engaged in first-party abuse, resulting in huge costs for merchants around the world. Some estimates put the cost at $48 billion a year.

This is a serious problem, and not just for traders. It also has an impact on consumers, who have to face higher prices resulting from this huge cost.

What do we do ?

For too long there has been a regulatory gridlock over first-party abuse, but two recent developments point to positive steps in the right direction.

The first is an industry-wide decision to change the name from “friendly fraud” to “first party abuse”. This type of fraud is not friendly, it is often clear fraudulent behavior, and the change to a more descriptive and accurate name shows how the perception of the problem is changing.

Another important development is the recognition of the problem by the Visa card network and its willingness to empower merchants to fight back.

Simply put, Visa’s updated dispute rules provide more opportunities for merchants to leverage data to prove certain chargebacks are first-party misuse. With these new Compelling Evidence 3.0 rules, merchants will now have more opportunities to provide evidence proving that a transaction was initiated by a consumer and potentially transferring liability to that consumer where it belongs. Prior to this rule change, there was little the merchant could do to win claims against consumers committing fraud.

When a card network like Visa implements an upgrade, the competition (i.e. Mastercard) will often follow. This could be the start of a radical transformation in how merchants handle first-party abuse and should help strengthen e-commerce fraud mitigation efforts at all levels.

Steps merchants can take

Looking at first-party abuse industry-wide is constructive, but what can individual organizations do to limit their exposure?

One of the most effective solutions is to ensure an accurate description of the merchant on all consumer-facing documents, such as credit card or bank statements. If a customer sees a description of a charge from a source they don’t recognize, they are much more likely to initiate a chargeback, even if the purchase was legitimate.

This problem can be mitigated by clearly indicating the name of the business, as well as any services provided, on any listing of transactions the consumer may encounter. This means clearly identifying the business name, optionally including a phone number and/or URL, and even including an order number if possible. It’s much better for a customer to call to confirm a transaction directly with a merchant than to go through the costly and time-consuming chargeback process.

The clearer a merchant’s description is, the less a customer can use ignorance as an excuse to initiate a chargeback.

Carefully considered consequences

If a merchant is certain that a consumer is attempting first-party abuse, there are thoughtful disciplinary actions that can be implemented to limit exposure.

Some merchants “reclaim” a purchased product (eg, an in-game item). Others use collection agencies to recover funds, and some even prevent a consumer from accessing a game or service by freezing their account for a fixed term or in perpetuity.

This process can be complicated when dealing with physical goods, but at a minimum, if a merchant is certain that a consumer is making a fraudulent claim, they should attempt to repossess the goods sold and prevent that consumer from selling. in the future.

Movement in the right direction

Understanding the pervasive and complex nature of first-party abuse is essential for anyone operating in the e-commerce space. Hopefully this information on what is being done to counter the threat proves that it is not an insurmountable problem.

With the collective strength of the entire payments industry finding new ways to reduce the threat, optimism for a future without first-party abuse is increasingly warranted.

This is good news for everyone.


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