Ai Editorial: Friendly fraud – a battle that still isn’t easy for airlines to cope up with

First Published on 17^th November, 2017

Ai Editorial: Airlines continue to struggle to avert the danger of friendly fraud. There are new developments, ones related to machine learning and biometric authorization, but are they robust enough to protect merchants? probes Ai’s Ritesh Gupta

Criminal Fraud, friendly fraud and merchant error are all major sources of chargebacks. The utility of data and technology in combating various forms of fraud is coming to the fore.

As for friendly fraud, it remains probably the biggest challenge and quite often the significance of an effective fraud mitigation strategy is underlined.

Friendly fraud refers to “fraud that is committed when an individual had knowledge of and/or was complicit with and/or somehow benefited from the transaction on their own account, although the individual reported the transaction as unauthorized”.

This type of fraud is a major issue for merchants as it can be tough to detect at the time of purchase, the chargeback process does not adequately address friendly fraud, and also it is time consuming to fight against the same.

Functioning of the industry

“The predicament (pertaining to friendly fraud) is getting worse,” says a senior executive.

The executive pointed out that the available data is limited. Merchants definitely suffer from industry-wide lack of transparency. Their stance is feeble as there are plenty of factors outside merchants’ control that influence their reluctance to make a more substantial effort. “There is hardly enough information available pertaining to chargebacks and friendly fraud. This means there isn’t a strong foundation to bank on, to comprehend the situation. It’s challenging to amass authentic information on the matter without substantial contribution from banks, card networks, and merchants,” added the executive.

As highlighted by Chargebacks911 in one of the interviews with us, until there is a reason code labelled ‘friendly fraud,’ merchants will forever be engaged in a guessing game—is this claim legitimate or friendly fraud? This uncertainty is what drives merchants’ inaction.

It is also pointed out that issuing banks and card networks decline to divulge critical data or specific numbers on chargebacks such as: dispute win rates. They typically don’t keep the kind of comprehensive records on the subject that would enable a broader view of the matter. Merchants need to blend professional assistance with chargeback management technology specifically designed to identify the true source of the transaction dispute.

One can question policies and regulations set forth for the entire industry. Issuers usually accept a customer’s assertion, and there is hardly any scope in terms of collaborating with issuers. It is clear that ecommerce wouldn’t prevail if card networks and issuers hadn’t taken initiatives to step up the buyer confidence when it comes to payment card use and liability. By abating cardholder’s fears about potential losses tied to fraud, networks and issuers have enabled entities to experience optimum profitability via card-not-present transactions. However, by advertising zero liability, issuers have inadvertently incentivized friendly fraud.

New developments

Airlines tend to be at the receiving end, for example, a cardholder buys airline tickets but intends to change the itinerary at a later stage. This could be due to any reason. Since the traveller doesn’t qualify for a full refund from the airline, the same passenger files a friendly fraud chargeback and points out that buy wasn’t authorized—when in fact, it was. So how to cope up with such cases where airlines suffer? In terms of sophistication, fraud prevention specialists are finding ways to evaluate the behavior of consumers and relying on machine learning for the same.

For instance, Nethone, a data science company, highlights that by identifying distinctive behavioural characteristics of each user, one can craft their digital profile and relate the same with behavioural profiles of previously identified fraudsters. The company, in one of their recent blog posts, stressed that it is viable to discover behaviour demonstrating that someone else than the rightful account owner is logged in, before the transaction is done. And this way merchants can secure transactions by activating a conditional authentication layer. Analysis can be around the purchase log from the past, taking into account the frequency of shopping, their average order value, in case there were any chargeback request previously, too, etc. Also, device fingerprinting, too, can be taken into account whether a given device has previously featured before for a fraudulent transaction. Importantly, Nethone also added that any level of additional authentication or “friction” should be added only where it’s essential and the probability of fraud is high.

The industry is also counting on biometric technology and additional layers of security and authentication.

From friendly fraud perspective, biometric authorization can used as a proof that at a customer did validate a transaction.

But this kind of authorization isn’t a complete solution on its own.

Yes, questioning a chargeback hinges on the merchant’s capacity to establish that the cardholder validated the transaction and that the merchant was in compliance with all applicable regulations. Biometrics can end up being a constructive part of evidence for merchants; the fact that biometrics are intrinsically tough to deceit is sound proof that a cardholder did, in fact, validate a transaction. But, as explained by Chargebacks911, the issue is that policies and standards laid down by the card networks do not keep up with the fast development of consumer authentication technologies. Biometrics can show that a cardholder almost definitely authorized a transaction, but if the card network won’t accept biometric data as evidence, that knowledge is useless.

In many ways, card network regulations are stuck in the past, unable to adapt to the rapidly-changing realities of ecommerce and the payments industry,” points out Chargebacks911’s COO, Monica Eaton-Cardone.

It is pointed out that card networks need to make biometric authorization a cornerstone of the dispute process.

Also, the stance of various stakeholders toward friendly fraud definitely needs to evolve, as much as new technologies can help.  

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