Trusted Customer or Friendly Fraudster? Why brands and retailers need to tell the difference

Friendly fraud, or first-party fraud, is a type of fraud in which a merchant’s own customers commit fraud against them by claiming undelivered goods, returning used products, faking returns, or requesting chargebacks to receive fraudulent refunds.

Whilst typically being committed by a merchant’s own customers, professional syndicates also exploit this vulnerability to defraud merchants.

Based on 2023, various surveys revealed:

1. Friendly fraud resulted in upwards of $100bn in fraud losses for merchants globally, with ~80% attributable to friendly fraud associated with the refund process

2. Friendly is growing at ~20% per year

3. 42% of GenZ admitted to committing friendly fraud, against 22% of Millennials and 10% of GenX

In this article, we will discuss the following topics:

• Consequences of friendly fraud on Brand & Retail businesses

• Why friendly fraud is increasing

• What merchants can do to mitigate the consequences of friendly fraud

Consequences of friendly fraud on merchant businesses

The fraud losses experienced by merchants are significant, and this trend is on the rise. However, these fraud losses and the obvious revenue impact of lost stock are not the only set of consequences of friendly fraud.

Other impacts of friendly fraud:

1. Friendly fraud creates a trust gap between merchants and all customers, with merchants being unable to differentiate between a trusted customer and a friendly fraudster, many resort to applying blanket approaches to all customers with serious impacts

   
   

2. When deciding these friendly fraud strategies, merchants will optimise either for fraud prevention, or customer experience.

   • With those optimising for fraud prevention implementing processes that delay refunds for all customers to allow time to control each returned package or delaying the fulfilment of orders to investigate orders before/after payment. These processes almost always have a negative impact of the experience of trusted customers which affects customer loyalty and retention in the long run

   • Merchants who choose to optimise for customer experience to protect customer retention, will generally honour all refund requests to provide fast refunds to benefit valuable customers. This approach has a hidden cost of unnecessarily high fraud losses owing to friendly fraudsters who abuse these practices to defraud businesses.

     
     

3. High volumes of friendly fraud drives up the amount of manual work for back-office support teams, call-centres and warehouse operations teams to process returns and refunds

   
   

4. For in-store sales teams, friendly fraud hampers customer service with brands leveraging only historic information to determine whether a shopper can be trusted. The result is that first-time customers may often be denied sales, or experience poor customer service, owing to a lack of visibility on whether they can be trusted or not. Additionally, decisioning processes relying on historic information create an opportunity for friendly fraudsters to repeatedly defraud the same brands owing to an incorrect perception that they are trusted shoppers. These incorrect perceptions are created owing to a lack of 360 consumer fraud risk intelligence.

   
   

5. In the context of pay-later offerings, like pay-by-instalment or pay-after-delivery, friendly fraudsters have additional opportunities to defraud businesses

Why friendly fraud is increasing

Friendly fraud typically occurs after a checkout (during the post purchase journey), and ‘offline’ in real life. As such, anti-fraud solutions built to detect online payment/identity fraud are unable to provide a tell for when it may happen. This creates a visibility gap, which is exploited by friendly fraudsters, as businesses unable to access the required consumer intelligence to make better decisions.

What merchants can do to mitigate the consequences of friendly fraud

• Collaborate with other stakeholders in the ecommerce-payments ecosystem: Collaborating (through data-sharing) with other merchants to identify friendly fraudsters across the ecosystem. This would create a safer ecosystem for all.

  
  

• Understand and treat your customers as individuals: Embedding 360 consumer intelligence into decisioning processes to enable personalised experiences for shoppers based on the customer's real fraud risk for your business.

  
  

• Offer fast refunds and otherwise seamless returns: More efficient refund process supported by automated refund decisioning for trusted customers will reduce the manual work for operations teams and improve experience for your customers. Automated refund decisioning can be complemented by access to 360 consumer intelligence for teams processing the remainder of refund requests from friendly fraudsters, to provide the information required to make the correct decision quickly.

  
  

• Apply clear and consistent order details: In the case of non-criminal first party fraud, clearly recognisable order details on customer statements will prevent chargebacks where customers may have forgotten about purchases or simply to not recognise transactions.

  
  

• Implement strong authentication methods like 3DSecure: In the case of chargeback fraud, 3DSecure typically shifts responsibility and liability to the consumer’s bank where proper authentication has not occurred. However, merchants with high chargeback ratios put their accounts at risk and face reputational harm. Ultimately, pushing this responsibility to the consumer’s bank does not protect a merchant’s business from future friendly fraud.

Friendly fraud does not need to go undetected or accepted as a normal cost of doing business.

The very nature of friendly fraud is that it involves a merchant’s real customers, so it is a pain point intertwined with customer experience and loyalty. Addressing friendly fraud proactively will unlock opportunities to further enhance customer experience, customer loyalty and drive retention towards repeat purchases; whilst creating a safer ecosystem.

With the Trudenty Trust Network, it is now possible to apply 360 consumer fraud risk intelligence based on a consumer's activity across the ecosystem to differentiate between trusted customers and friendly fraudsters.

To learn more about how we do this, visit our website and send us a message to get started.

We welcome Brand & Retail Merchants to visit the Worldline IEC, in Paris, to meet with the team and experience an in person demo of how the Trust Network helps you. Contact us to arrange a visit.