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Friendly Fraud: Your Worst Enemy

By Emily Chin  / 

3 Dec 2015

Is shoplifting so wrong? I mean, is it really a crime to walk into a shop and then walk out with something without paying for it? Yes! Of course it is. Shoplifting is often about wants, not needs, and people who shoplift are often able to afford the stuff that they steal. In fact, shoplifters tend to look, act, and shop like good customers, which makes spotting them early so difficult. Now, imagine trying to catch a shoplifter without being able to see them. That’s the challenge that faces folks tasked with stopping friendly fraud.

Shoplifters+Wanted
Shepard Fairey’s “Shoplifters Wanted”, photographed by Graham C99, found on Flickr

What is friendly fraud?

Friendly fraud is the internet’s version of shoplifting. Friendly fraud can come about in a few different ways:

  • When a customer initiates a refund with a retailer for a good or service purchased online that they received but claim was never delivered.
  • When a customer disputes a credit card charge with their bank, claiming that they didn’t authorize a certain transaction, although they actually did and already received the goods.
  • When a customer accidentally forgets that they (or someone with access to their card/ account) purchased and received a good or service and initiates a chargeback.

In all of these cases, the merchant is out the cost of their product, any handling costs, and is likely hit with chargeback fees by their bank. Friendly fraud costs retailers billions of dollars per year, and an estimated 86% of chargebacks are thought to be fraudulent.

So what’s the problem?

Why is friendly fraud such a big deal? Because it’s so hard to catch. Merchants often default to the old saying The customer’s always right in order to shape their customer service and refund policies. If a person acts like a good customer and spends like a good customer but has the occasional odd refund request, it feels easier to just issue the refund instead of pushing the issue.

Without the facts, the blame for friendly fraud can too easily be spread around. The fraudster may blame the shipper, sticky-fingered neighbors, or unsecured delivery routes. With many factors in play, the merchant can only track the package to delivery, but can’t verify receipt of a package or that the intended recipient actually opened the box.

What are the side effects of friendly fraud?

The repercussions of friendly fraud fall squarely on the merchant…and eventually their customers. Shoppers will inevitably feel the ripples of friendly fraud in the form of increased prices as the merchant works to offset the fraud cost. The true cost of fraud is a real bummer; for every $1 that a merchant loses on a transaction, it costs them $3. In order to recoup the lost merchandise, lost man hours, chargeback fees, etc., merchants need to find those extra funds somewhere – cue the slight uptick in prices.

Why is friendly fraud so hard to combat?

Friendly fraud is exceptionally hard to spot and stop. Unlike credit card testing or using stolen data to purchase big ticket items, someone may not even consider committing friendly fraud until after the package is in their home and well-used. As mentioned before, the fraudsters that commit friendly fraud generally look, shop, and behave like legitimate customers.

Sometimes, a fraud solution vendor will promise the ability to catch friendly fraud; however, chances are good that they’re just practicing excellent marketing. Here at Sift Science, we’ve been examining data for reported instances of friendly fraud to see if it’s possible to spot before it hits. What did we find? When plotted on a graph based on their behavior and what we know about them, the friendly fraud users overlapped with both “regular” fraud users and non-fraud users.  In other words, the data confirmed that friendly fraud – for all intents and purposes – looks just as random as other buying behavior, both good and bad.

So what can you do to reduce friendly fraud?

Simple verification steps – that may seem like a pain for your customers – can help you in the long run, which in turn keeps your prices competitive. Requiring a signature for delivery or scheduled delivery times can reduce casual friendly fraud. Asking for the 3 digits on the back on a credit card at the moment of transaction can help to ensure that the purchaser is in possession of the card, although that’s no guarantee.

Perhaps the best approach is to ensure that you have as much data as possible on the actions of the buyer. From the moment a shopper lands on your site, you should aim to see how he’s behaving – is he clicking around a bit, adding and removing options from his shopping cart? How long does he wait before hitting the buy button? All of these nuances can help to paint a picture of your shopper and distinguish the friendly fraud from the hostile fraud.

 

 

 

Related

featuredfraudfriendly fraud

Emily Chin

Emily Chin was a manager at Sift.

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