Unlike more traditional fraud, where fake names, mismatched addresses or dubious payments provide actionable clues before or during check-out, friendly fraud is more difficult to detect and expensive to remedy. That means merchants need to be mindful of gaps in AI fraud detection when it comes to friendly fraud.

With friendly fraud, the customer info squares up — it’s a real name, valid card, matching shipping and billing addresses, verified email, and often, a long-standing relationship with the retailer. But with friends like these, who needs enemies?

There are two types of malicious friendly fraud and one variety that actually is friendly, or at least not intentionally unfriendly. The two malicious types each employ similar tactics, a customer claiming they never received the item or that the product was not as described. If the fraud goes as planned, they get their money back and keep the merchandise. 

There are different types of first-party fraud

The first type of friendly fraud stems from people with bad intentions. They have a plan – take advantage of a retailer’s return policy to put money and goods in their own pocket. Many will test the waters with a retailer, finding the cracks in their policies and looking for gaps in AI fraud detection in order to more aggressively reap ill-gotten gains. Most are individuals, although some operate in broader criminal organizations, which have increasingly seen retail fraud as a reliable revenue stream. Many of the products find their way to the black market or resale sites. 

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Chargebacks are a costly reality for many merchants, eating into profits and causing headaches for customer service teams. In 2021, chargebacks were estimated to cost merchants a staggering $125 billion globally, with that number expected to rise to $206 billion by 2025 (Juniper Research, 2021). To effectively prevent and manage these disputes, it’s crucial for merchants to understand the difference between fraud and non-fraud chargebacks.

Nobody’s fault but mine: non-fraud chargebacks due to merchant error

While fraud and friendly fraud often take center stage in discussions about chargebacks, it’s crucial not to overlook the role of merchant error or negligence in non-fraud chargebacks. When a merchant fails to fulfill their obligations or provides subpar products or services, it can lead to legitimate chargebacks from dissatisfied customers.

One common scenario is when a merchant never ships out an order or ships an item that is broken or significantly different from what was described. If the merchant then fails to provide adequate customer service to resolve the issue, the frustrated cardholder may resort to filing a chargeback to obtain a refund.

Merchant error can also occur when a business does not clearly communicate its policies, such as return or cancellation procedures, leading to confusion and disputes. Additionally, technical issues on the merchant’s website, such as incorrect product descriptions or pricing errors, can contribute to non-fraud chargebacks.

To minimize chargebacks due to merchant error, businesses should prioritize providing excellent customer service, promptly addressing concerns, and offering fair resolutions. Clear communication about policies, accurate product descriptions, and reliable order fulfillment processes can also help prevent disputes.

Merchants must investigate the root causes of their chargebacks and identify any patterns related to merchant error. By taking responsibility for their mistakes and implementing corrective measures, businesses can reduce the occurrence of non-fraud chargebacks and maintain positive relationships with their customers.

When criminals strike: third-party fraud chargebacks or “true fraud”

Third-party fraud chargebacks, also known as identity theft or true fraud, occur when a criminal uses stolen credit card information to make unauthorized purchases. This can happen through various means, such as data breaches, phishing scams or skimming devices. In these cases, the legitimate cardholder disputes the charge, resulting in a chargeback.

The impact of true fraud on merchants can be severe. In addition to the immediate financial loss from the disputed charge, merchants may face increased chargeback rates, which can lead to higher processing fees and even the risk of losing their merchant account. True fraud can also damage merchant-customer relationships, as customers may lose trust in a business that has allowed fraudulent transactions to occur.

The wolf in sheep’s clothing: first-party fraud chargebacks or “friendly fraud”

Friendly or first-party fraud chargebacks, are disputes initiated by customers for reasons that may or may not involve criminal intent. Let’s take a closer look at the four most common sources of chargebacks categorized as friendly fraud.

Gaming the system: chargeback fraud

Chargeback fraud, in contrast, is a deliberate attempt by a customer to exploit the chargeback process for financial gain. In this scenario, a customer may purchase a product or service, then file a chargeback claiming it was never received or was unsatisfactory, while still keeping the item or benefiting from the service.

Family ties and forgotten transactions: the unexpected sources of chargebacks

Family fraud and forgotten purchases can also contribute to the chargeback chaos. Imagine a teenager going on a secret shopping spree with their parent’s credit card, or a cardholder forgetting about a subscription renewal and disputing the charge in confusion. These scenarios, where the purchase is made by a family member or acquaintance without the primary cardholder’s knowledge or consent, can lead to chargebacks.

Any and all of these kinds of friendly fraud chargebacks can have a significant impact on merchants. Like true fraud, these types of chargebacks lead to revenue loss, increased chargeback rates and strained customer relationships. Friendly fraud, in particular, can be frustrating for merchants, as it sometimes results from unintentional customer behavior rather than malicious intent.

Decoding the differences between fraud and non-fraud chargebacks

Distinguishing between fraud and non-fraud chargebacks is essential for merchants to develop targeted chargeback prevention and management strategies. By identifying patterns and characteristics unique to each type of chargeback, merchants can more accurately categorize disputes and take appropriate action.

Fighting back: an overview of prevention and management strategies

Merchants should consider implementing financial measures such as liability shift coverage, using fraud detection tools and improving communication with customers to reduce confusion and regularly monitoring disputes to gather evidence for representment.

Working with a chargeback management service can also be beneficial, as these providers have the expertise and resources to help merchants navigate the complex chargeback process and minimize losses.

The bottom line: understanding chargebacks is key

Understanding the differences between fraud and non-fraud chargebacks is helpful for merchants looking to protect their bottom line and maintain strong customer relationships. By recognizing the unique characteristics of true fraud, friendly fraud and the subsets of chargeback fraud, merchants can develop targeted strategies to prevent and manage disputes effectively. Implementing a combination of security measures, customer communication and professional support can help merchants reduce the costly impact of chargebacks and focus on growing their business.

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But digital channels also account for more than half (53%) of retailers’ losses due to fraud, and pure online retailers suffer nearly 40% more fraudulent transactions than mostly brick-and-mortar ones, says Nexis/Lexis.

Added to that, the role of the CFO is changing. CFOs today must manage the integration of new technologies, strategically innovate business functions, and stay on top of economic trends and shifting consumer behavior.

And although preventing fraud has traditionally been a retail CFO responsibility and many CFOs have faced the daunting task of predicting the cost of fraud, risk management has not always broken through as a top priority. 

That needs to change. 

Three levers for fighting fraud: Cost, business opportunity and customer experience

The argument for building up large, internal anti-fraud infrastructures and personnel has historically been to curtail the money lost and expenses incurred due to fraud. In other words, avoid costs.

But there are two other aspects of fraud that CFOs must consider. Those are the potential for fraud management to optimize revenue the nexus between smart fraud prevention and improved customer experiences. 

CFOs have long focused on the cost side of the fraud prevention equation — fraud losses and their bottom line cost. According to the Lexis/Nexis study, each instance of retail fraud results in out-of-pocket costs that are three times the face value of the products stolen or lost.

Cost of fraud, sure. But what about leaking revenue? 

But fraud also limits merchants’ opportunities to maximize sales revenues. When a good customer gets mistakenly turned away because of suspected fraud, you suffer a quantifiable loss of revenue because you don’t sell the product — or products — they wanted to purchase.

Not only that, but the cost of acquiring that disappointed customer was squandered — no small issue with the cost of customer acquisition soaring. 

And then there’s customer experience. Today, customer loyalty suffers when good customers are erroneously denied, or when it’s too much bother to prove their authenticity through cumbersome payment gateways, clumsy fraud management processes, or overly intrusive two-factor authentication. 

Fraud protection is a customer-experience driver

Signifyd CFO Jason Eglit says those working to manage ecommerce risk do themselves a disservice when they ground the dialogue in fraud. 

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“They [fraudsters] have the same kind of mindset — and it really is kind of a battle against each other,” says Xavier Sheikrojan, senior risk intelligence manager for Signifyd. “So they’re not better, but I would also not underestimate them.”

Identity theft has reached a new level

An elevated form of AI, generative AI (GenAI), has upped the challenge by giving criminals even better tools: With GenAI, fraudsters can create synthetic identities with deep fakes that include not only images, but voice cloning. Customer service representatives may think they took a phone call or FaceTime order from a regular, loyal client, but did they? Was that really Mr. Miller they spoke with? 

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Allowing more good customers to successfully transact can be transformational for a business, however, with the persistent threat of fraud looming large, merchants often find themselves walking a tightrope between minimizing risk and maximizing approval rates. In this dynamic landscape, the case for prioritizing pre-auth for fraud protection emerges as a strategic imperative, promising not only enhanced security but also improved authorization rates and, consequently, increased revenue potential.

Authorization is a crucial point in the online payment chain. To review, authorization is the process by which the credit card issuing bank confirms the basics are covered — the account contains sufficient credit to complete the transaction, sufficient account details are present, the account is not expired, etc.

Here are the five explanations for why moving your fraud controls pre-auth, or before authorization, can improve customer experience and drive more top-line revenue:

1. How does sending clean traffic to issuers naturally improve authorization rates

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This, American Express knows. The card network recently instituted a relaxed AMEX CID (card identification number) chargeback policy that means consumers will have an easier time during that perilous checkout stage in which they need to furnish their card details on a digital site.

As a senior chargeback analyst at Signifyd, I live for following these sorts of changes, which card network brands periodically issue to better serve their customers. In my role, I understand the importance of card network brands having rules in place. They’ve devised the rules to help protect their users — both the cardholder and merchant — and the integrity of the card brands in general. Each card brand has devised similar rules which provide fair practices among card users, issuing banks and merchants. 

The Amex CID chargeback policy is meant to ensure fairness

However, while the rules are devised to ensure fair practices, they still face the challenge of customers who use the rules to abuse the system. 

That’s why an important part of my role on the Signifyd Chargeback Team is to stay up to date with the latest rule changes and provide feedback to the card brands when something isn’t working or rules are being abused. That helps the card brands in their effort to keep providing an integral service to their merchants.

At Signifyd we need to always make sure we are using the rules to the best of our ability to fight unfair chargebacks that are raised against our merchants in order to help combat losses. 

CID mismatches led to consumer inconvenience and cart abandonment

So, why this latest change? American Express continually seeks feedback from their customers in order to keep making positive changes to financial products and services.  Many of their business merchants were telling them that their customers were having a negative checkout experience when the Card Identification Number (CID) entered on an order failed to match the CID embossed on the customer’s card and on file with the card issuer. When CID mismatch happens, the customer has to re-enter all their card details again. Some abandon their cart altogether instead. Merchants asked American Express if it could make the checkout experience simpler while also providing some sort of protection in the worst-case scenario: The cardholder raising a false fraud chargeback with their issuing bank. 

On April 12, AMEX unveiled a new CID chargeback policy. It says that if a merchant receives a valid authorization on a card-not-present transaction and that transaction turns out to be fraudulent, the American Express issuing arm will write off the fraud and prevent the chargeback from being sent to the merchant under specific circumstances.  The policy applies to cases in which the merchant obtained a valid authorization and then attempted to validate the CID and the response it received was either “no match,” an “unchecked” or a “no response.”

New CID rules come with a fraud liability shift

In other words, under those circumstances, the fraud liability will be shifted and the chargeback will not count against the merchant’s chargeback rate. 

Merchants can now feel confident submitting approved CID mismatches knowing they now enjoy a liability shift to American Express for orders that turn out to be fraudulent. The hope is that the policy change will help increase merchants’ sales and profitability because fewer customers will be inclined to abandon their carts when the CID does not match. With a smoother checkout process, the customer will be more likely to buy from the merchant in the future. 

At Signifyd, we hope to see less friction when a customer is purchasing using an American Express Card from one of our many merchants if the transaction should fail due to a CID mismatch.

The AMEX chargeback policy now gives merchants peace of mind and consumers added convenience

Now our merchants’ payment processors should automatically put through the transaction without the cardholder having to complete the transaction in full again. With fraud pressures currently on the rise, our merchants will feel at ease knowing that their checkout process has been better for their customers with the added protection of the liability shift should the order result in a fraud chargeback due to CID mismatch. With Signifyd providing a chargeback guarantee on both fraud and consumer abuse chargebacks, merchants can set chargeback worries aside. 

 At Signifyd, we’re mindful of the new Amex CID chargeback policy. We have altered how we detect those chargebacks. Should a chargeback arise out of a CID mismatch for any of our merchants, we are ready to present evidence that our merchants have completed their due diligence by checking the CID at checkout.  We want to make sure that American Express protects our merchants in this one area with the same vigor that we at Signifyd protect them throughout the shopping journey. 

Want maximum peace of mind when it comes to chargebacks? Let’s talk.

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At Signifyd, we understand that selecting an anti-fraud vendor is a commitment to a long-term relationship.

Any seasoned ecommerce leader knows that fighting fraud and maximizing revenue are two sides of the same coin: They will need a partner who will protect them from the slings and arrows of relentless fraud attacks while partnering deeply to hit revenue and conversion targets.

The post POC vs. POV: Evaluating ROI with fraud protection vendors appeared first on Signifyd.

From first-party scams by legitimate customers to full-scale criminal enterprises that stalk and scheme, attack, regroup, then patiently lie in wait to strike again, ecommerce risk prevention experts think it’s time for retailers to update their fraud management strategy with AI-driven solutions backed by human intelligence and domain experts. 

It’s called survival.  

“At Saks we are committed to doing the best that we can but there [are] just things we’re going to have to do to scale this because these fraudsters are, they’re good, they’re really good,” said RJ Cilley, chief operating officer at Saks, speaking about return abuse and challenges at Signifyd’s FLOW summit 2024.

It’s time for heightened fraud awareness 

Merchants lost $41 U.S. billion in ecommerce fraud worldwide in 2022, and an estimated $48 billion in 2023. Equally concerning and quite scary is that fraud losses of $343 billion are predicted to accrue globally from now until 2027.  

“Retailers have to start getting prepared for a little bit of a new world,” said Michael Pezely, Signifyd’s senior director of risk intelligence. “In this environment that we find ourselves in, where inflation is persisting, we’ve got interest rates that are rising, and, of course, geopolitical tensions that are trickling down – in some unexpected ways this environment is actually potentially fueling more fraud.” 

Pezely says there are three pre-indicators of the fraud rise in ecommerce: Fraud pressure has risen on the whole about 50% year over year. First-party fraud has also dramatically increased over the years. In some businesses, 40% to 60% of fraud chargebacks are actually first-party fraud. And account takeovers are up close to 300%. 

On top of all that, and beyond the rise of first-party fraud, the fraud industry is becoming industrialized, spawning sophisticated, global enterprises with specialists in ecommerce, fulfillment and fraud prevention. These rings are illicit businesses that operate in regions where regulation is weak and geopolitical upheaval has resulted in a high degree of lawlessness. 

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We spoke to Signifyers in Colorado, North Carolina, Mexico and Belfast to get an idea of what drew them to Signifyd and its mission to enable fearless commerce. And we asked them what keeps them around. You’ll hear some common themes about a focus on employee fulfillment and the opportunity to work at a place that provides solutions for online merchants, improving their lives while enhancing customer shopping experiences. But it’s more than that. Given that Signifyd is a diverse company with employees around the world, you’re bound to hear some unique perspectives — on to the stories.

Maureen Young, Colorado: Great product and inclusive company culture  

Maureen Young, an account executive on our Core Sales team, shares her journey at Signifyd and what attracted her to the company when she joined in 2021. 

Signifyd Account Executive Maureen Young

What attracted me to Signifyd was primarily the product. Witnessing Signifyd’s profound impact on thousands of merchants, offering them a solution that not only saved time and money but also alleviated the headaches caused by fraud, resonated deeply with me. Signifyd’s mission was something I knew I wanted to be a part of.

Signifyd’s culture is a blend of inclusivity and a strong focus on employee well-being and development. While the product initially drew me in, it’s the supportive and nurturing environment that keeps me committed. Professional and personal growth are not just encouraged but actively supported through dedicated programs and continuous learning opportunities.

One of the most rewarding aspects of my job is seeing the tangible impact on our customers’ lives. Ecommerce challenges like fraud and high decline rates can be deeply personal for business owners. Knowing that Signifyd’s advanced solutions empower them to focus on revenue-generating activities rather than reactive fraud strategies is incredibly fulfilling.

Jesus Alvarado, Mexico: Motivated by delivering value to merchants 

Jesus Alvarado, a senior risk analyst on our Risk Intelligence team, reflects on his experience at Signifyd and the company’s culture of innovation and support. 

Joining Signifyd was a natural fit for me, combining my passion for technology and finance with the opportunity to combat fraud in ecommerce. The company’s culture, centered on delivering value and fostering innovation, motivates me to excel every day. I appreciate the trust-based environment that encourages everyone to contribute their best.

Signifyd Senior Risk Analyst Jesus Alvarado

As a senior risk analyst, I thrive on the dynamic challenges of fraud prevention and the collaborative spirit within our teams. Signifyd’s support for professional growth is remarkable, with opportunities for leadership and innovation readily available. One of my proudest moments was leading a project that enhanced our client processes, highlighting the company’s commitment to employee empowerment.

Signifyd’s transparent communication channels and culture of recognition ensure that every employee feels valued and supported. Monthly all-hands meetings with the CEO and ongoing feedback from managers contribute to a sense of alignment and appreciation. It’s this combination of innovation, integrity and recognition that sets Signifyd apart as an exceptional workplace.

Asa Beavers, North Carolina: Solving real-world problems is motivating

Asa Beavers, a senior customer success manager within our Customer Success organization, discusses the culture of continuous improvement and collaboration at Signifyd. 

When I first learned about Signifyd, I was captivated by its mission to solve real-world problems in the retail space. The company’s innovative approach and strong cultural values immediately resonated with me. Today, I still feel privileged to be part of a dynamic team with an exceptional company culture that fosters growth and collaboration.

Signifyd’s culture is defined by values like “tenacious” and “roll up your sleeves,” emphasizing the dedication and teamwork required to achieve our goals. As a Customer Success team member, I cherish the opportunity to interact with diverse teams internally and externally, forging relationships that enrich my professional journey.

Signifyd Senior Customer Success Manager Asa Beavers

Signifyd has been instrumental in my professional development, providing exposure to leading brands in online retail and expanding my expertise in ecommerce, payments and fraud prevention. The passion and hard-work ethic of my colleagues inspire me to strive for excellence every day, fostering a supportive environment focused on customer success.

I’ve been fortunate to receive recognition for my contributions through various channels, including the Signifyer of the Month award and acknowledgment from my team during monthly meetings. These gestures of appreciation reinforce Signifyd’s commitment to recognizing and rewarding employees.

Emma Deane, Belfast: A company culture of continuous improvement 

Emma Deane, a senior software engineer on our Engineering team in Belfast, joined Signifyd right after graduation. She shares her perspective on Signfyd’s empowering company culture and commitment to excellence. 

Signifyd’s mission to combat fraud through technology initially drew me in, but it was the empowering culture and collaborative spirit that sealed the deal. In our Engineering organization, we embrace a culture of continuous improvement and teamwork, summed up by the mantra “one team, one dream.”

Signifyd Senior Software Engineer Emma Deane

What I find most rewarding about my role is the daily opportunity for problem-solving and collaboration. Signifyd encourages us to dig deep into challenges, fostering personal and professional growth. Pair programming and regular learning sessions further enhance our development.

A standout moment for me was participating in the development of a new feature that enhances our merchants’ integration experience. This project showcased our team’s innovation and direct impact on customer satisfaction. Signifyd’s commitment to employee recognition and reward, evident through initiatives like the Praise Slack channel and regular retrospectives, reinforces our culture of growth.

Consider what Signifyd can offer you

Through the perspectives of these employees, we’ve uncovered why Signifyd stands out as a workplace of choice. Whether it’s the innovative projects, the supportive environment or the shared values, Signifyd offers something to each and every one of our employees.

We’re excited to continue this journey together, fostering innovation and creating meaningful impact in everything we do. Thank you to our employees for sharing their insights. Here’s to many more years of success and growth! 

Photo by Mike Cassidy

Interested in joining the Signifyd team? Find your role.

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This guide will help you better understand this approach to fraud management and will, of course, explore the aforementioned myths and realities accompanying the 3D Secure in America chatter.

What are some common myths about 3DS in the United States?

Myth: 3DS is the only option for shifting liability

Reality: No doubt, 3DS’ liability shift — moving the cost of fraud from merchant to an issuer or fraud protection provider — is an attractive feature for merchants. But that benefit is not unique. A relatively new generation of fraud protection providers also offers a liability shift on approved orders that ultimately turn out to be fraudulent. While such providers are few in number, and the level of their protection varies, the top providers have offered liability shifts for years — the best offer liability shift without requiring consumers to overcome step-ups and challenges. Merchants should carefully consider all options in this space.

Myth: 3DS is only beneficial for high-fraud sectors

Reality: Some argue that 3DS is only necessary for sectors with traditionally high rates of fraud, such as luxury goods or electronics. In fact, 3DS is equally effective in all sectors and can reduce chargebacks across the board. The tendency in the U.S. is to lean toward using 3DS for the riskiest orders. Merchants balance the potential risk of cart abandonment with the reward of liability shift. When confronting orders they’re not willing to ship, some merchants will use 3DS review, reasoning that the order is a low-percentage order anyway, so if the buyer fails the challenges, they’re no worse off. If, on the other hand, the order is approved, the merchant has no worries that it will later come back as a chargeback.

Myth: 3DS and its liability shift are all the fraud protection you will need

Reality: 3DS is best viewed as part of a larger set of fraud protection solutions and strategies. Not only is 3DS something merchants want to be thoughtful about using so as not to risk challenging good customers, but it doesn’t protect merchants from every kind of chargeback. As fraud grows in sophistication, first-party fraud is a threat that is increasing faster than traditional payment fraud. First-party fraud is fraud committed by the rightful credit cardholder, such as claiming a package that did arrive never arrived or that a product that arrived was damaged when it was not. For many merchants, it’s important to have a fraud solution, such as Signifyd’s Commerce Protection Platform, that offers a financial guarantee on all manner of chargebacks, including first-party fraud and consumer abuse.

From Q1 2023 to Q1 2024 friendly fraud growth outstripped payment fraud

How does 3DS work in the United States?

The U.S. credit card market is one of the largest and most diverse in the world, with a significant volume of both online and offline credit card transactions. The adoption of 3DS in the U.S. has been influenced by the need to secure a growing volume of ecommerce transactions against an increasing rate of online fraud. That said, 3DS adoption has grown slowly in the U.S., perhaps because of its potential to introduce additional friction into the buying journey. 

As any merchant knows, online fraud constitutes a serious line item expense on the profit-and-loss ledger. With credit card dumps on the so-called dark web available to anyone with enough cryptocurrency, U.S. merchants need a better way to validate online transactions.

3DS is not required in the United States

Unlike the European Union, where strong customer authentication (SCA) requirements under the PSD2 directive mandate the use of technologies like 3D Secure for enhancing security in electronic payments, the U.S. does not have a similar overarching federal regulation mandating the use of 3DS. This has led to a more voluntary adoption path driven primarily by the benefits of fraud reduction and lower chargeback rates rather than compliance pressures. Merchants have been slow to adopt 3DS in the U.S., perhaps because of the availability of advanced solutions that provide a liability shift. 

Key takeaways for merchants

Merchants in the United States have the option of adding 3D Secure to their payment stacks to help reduce fraudulent transactions and chargebacks. The solution is one way to benefit from a liability shift in card-not-present transactions and it provides a data-exchange feature that can be helpful in determining whether the rightful cardholder is adding a card to an existing account. 

The improvements found in the newest versions of 3D Secure make it a helpful complement to the tools and strategies merchants deploy to enhance their revenue and protect their businesses. 

Photo by Getty Images

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