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Consumer fraud risk

Increased consumer spending brings increased consumer fraud risk, says Monica Eaton-Cardone, CIO and co-founder of Global Risk Technologies.

Search online or any image library for ‘thief’ or ‘fraudster’ and chances are an image of a man in a horizontally striped jumper, a face mask, or hoodie and a ‘swag’ bag over his shoulder – will be high up the list. However, this imagery is being challenged through the growing issue of online fraud. Today’s thief could be dressed a businesswoman, a builder, or even someone in their pyjamas. Criminals are increasingly sitting anonymously behind a computer screen and online purchases become the norm. What is less recognised by merchants, retailers and banks is that these ‘criminals’ are increasingly just ‘normal’ consumers. Can they stay ahead of this growing and largely overlooked online threat to their bottom lines? I believe they can as long as they don’t ignore the problem.

Online spending is exceptionally popular in Europe which is currently outstripping the US in terms of growth. In the UK alone it is expected to grow 14 per cent reaching £156.67bn in 2015. Of particular concern is the fact that the UK has featured in the top three countries for ‘fraudulent severity levels’ in 2013 and 2014, only beaten into third place by an alternating France and Greece. Inevitably, the increase in online spending brings increased opportunities for criminal activity, most of which are centred on fraud.

Card-Not-Present (CNP) fraud mostly takes place online, and can be the result of hacking, account takeovers, but also the lesser-known ‘friendly fraud’, which is where the purchaser fraudulently claims the goods they received were not delivered. Typically the claimant approaches their bank to challenge the transaction, who in most cases finds in favour of the consumer, leaving the merchant out of pocket. This ‘charge-back’ often occurs with little verification taking place of what actually happened and consumers are taking advantage of this loophole.

Online charge-back fraud is a huge issue to retailers and according to VISA the global cost of friendly fraud to the retail sector is £7.5bn a year and growing. The cost ratio for merchants is typically three times the value of the initial fraud, contributing a significant sum to pay out from an already pressured bottom line.

One of the issues merchants face is adhering to a common commercial directive to keep good customer experience at the top of the list of sales priorities. With online purchasing hailed as the future, and competition for customers at an all-time high in a burgeoning market, all efforts are focused on managing fraud without upsetting customers. This belief has gained strength and is supported by research with a recent Gallup poll reporting that fully engaged customers yield 23pc more in terms of ‘share of wallet’ than the average cardholder, while disengaged cardholders deliver 13pc less. There comes a time when these losses must be accounted for.

Why is this type of fraud getting worse? According to the FICO latest European Fraud Insight report, if you ask the question in the UK ‘are we winning in the fight against CNP fraud?’ – The answer is a cautious YES when comparing the ratios of ‘online spend growth figures’ against expected fraud figures. The problem is that most merchants are not aware of the friendly fraud ever taking place, which is why it remains under the radar as a significant threat to profits and a problem that the sector needs to address – quickly!

Among the statistics are examples of unintentional friendly fraud, but there’s a rising tide of customers deceiving merchants by receiving a product, then deliberately seeking a refund through their bank by claiming it was never delivered. This is a particular worry for merchants as 86% of cardholders file the dispute directly with the bank without notifying the merchant. What’s more, 50% of cardholders who don’t get caught will do it again within 60 days, burdening merchants with rising liabilities and costs. In all these cases, the merchant can not only lose the sale but also the product. Additionally, they face fines from their bank and an erosion of their card brand statistics.

Inaction not an option

Friendly fraud may have been growing by over 41% in recent years but it is not an inevitable part of doing business and no ecommerce business should take it lying down. So what can merchants do about it? Well, the first thing is… do something! A typical instinctive reaction may be that this drip-drip erosion of profits is something merchants have to put up with, but that’s simply not the case. Changes to combat friendly fraud don’t necessarily involve additional costs and threats are best tackled early. In the following five examples, simple changes can also improve the overall business model:

1. Maintain impeccable records – If records include delivery receipts, then a customer’s claim that they “never got the parcel” is easy to disprove.

2. Concentrate on customer service – If customers are unclear on who to turn to when an order doesn’t go as planned then they are more likely to go to their bank. By proactively keeping each customer informed at all stages of the process, from an email confirming the order, to tracking a delivery, it’s more likely that the problem will be brought directly to the merchant business, reducing the chance of a charge-back. Admittedly, being available to answer e-commerce queries comes with its own set of challenges, as peak times for shopping are outside the traditional nine-to-five. However, attention to social media and email queries along with extended telephone query hours can prevent uncertain customers demanding refunds.

3. Be responsive – Put best practices in place for any scenario so you can react quickly and effectively.

4. Optimise logistics – A lose-lose situation for any merchant is when a payment is refunded, only for an item to be delivered late. The customer expectation these days is for parcels to arrive promptly, if not within 24 hours. The longer the delay, the more nervous they get. Therefore, any streamlining of the delivery process, be that improved warehouse management or a faster courier, will reduce the instance of customers demanding charge-backs.

5. Pursue criminals to the full extent of the law and publicise the prosecutions. It will act as a future deterrent.

One size does not fit all

While best practices such as these will reduce the instances of friendly fraud, they can never eliminate them entirely. After all, there will always be someone who sees no harm in receiving the odd ‘free’ parcel by cancelling payment. However, that’s no reason for businesses to passively take these hits.

When wrongfully filed charge-backs do hit, what can be done? We’ve witnessed case studies showing that more than 50% of a merchant’s charge-backs are due to friendly fraud instances. Analysing the pattern of these instances can reduce this figure by highlighting repeat offenders, by showing which charge-back revenue should be reclaimed and by flagging up seemingly lucrative transactions that have a greater risk of being fraudulent.

While this may sound a daunting prospect for businesses, much of this checking can be automated in such a way as to effectively discourage future disputes. Specialists can advise on solutions and strategies to handle chargeback compliance, risk mitigation and fraud management before they harm revenues, growth or profits.

Improving business profitability

Online payments are a growing and never-ending world of change. As quickly as change happens, the number of criminals identifying and trying to exploit the change increases alongside it. There is, and always will be a continuing battle to stay one step ahead of the criminals, especially when it so easy to hide as a ‘normal’ consumer, but to do so involves being aware of each threat and putting in place the infrastructure, practices and partnerships to address them. Ultimately, there is no one solution that fits all, but improving education and awareness while minimising friendly fraud losses is a critical step to increasing profitability and ultimately business success.


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