What Tools Help Manage Friendly Fraud?

It’s always great when all-in-one solutions reduce the number of tools you need to get the job done. You want your business management tools to be as efficient and cost-effective as possible, and this is a common consideration when merchants shop for a fraud management tool. They find a platform with all the bells and whistles – a single tool that can protect against account takeover, unauthorized payments, and every other criminal act in between.  But what about friendly fraud? Does that all-in-one platform include friendly fraud management? The answer is most likely no.

Two types of fraud: malicious fraud and friendly fraud

A lot of merchants lump all risk together as “fraud”. It might seem like all fraud is the same, since chargebacks are issued and revenue is lost. But there are actually two very different types of fraud: malicious fraud and friendly fraud.

Here’s how Midigator defines the two threats:

Malicious Fraud
A criminal steals a cardholder’s payment card or account information and uses it to purchase merchandise or services
Friendly Fraud
A cardholder requests an illegitimate or unwarranted chargeback–either as an intentional attempt to get something for free or an innocent misunderstanding

If you don’t distinguish between these two different threats, you’ll be tempted to use one tool to manage everything — which would likely cause a lot of unnecessary revenue loss. Just as your business is exposed to multiple threats, you need multiple layers of protection – different tools used at different stages of the transaction life-cycle.

Which tools do what?

If one tool can’t do everything, how many different tools do you need? Which tools do what? Here’s a breakdown of the available tools and how you can use them to create the most comprehensive risk management possible.

1. Fraud Detection Tools Offered by Third-Party Service Providers

There are dozens of service providers who can help you detect fraud, authenticate transaction data, and verify a shopper’s identity. These tools check for characteristics that are commonly associated with fraudulent activity.

Do these tools help manage malicious fraud?

Yes! These tools are specifically designed to detect malicious fraud. They usually analyze data before the purchase is finalized, so you can cancel transactions that are probably unauthorized.

Do these tools help manage friendly fraud?

These tools cannot identify friendly fraudsters. Since there are no red flags for friendly fraud, there is nothing for these tools to detect. Using them to block orders that could result in friendly fraud will cause a lot of unnecessary false positives.

However, data obtained by these tools can sometimes make your chargeback responses more compelling. If you want to fight friendly fraud, you’ll need documents that create a persuasive argument. If the cardholder alleges the transaction was unauthorized, data collected by a pre-sale fraud detection tool could help contradict that claim.

That said, your pre-sale fraud detection tool cannot fight friendly fraud nor recover lost revenue. Some fraud tools might reimburse you for chargebacks, but those guarantees come with restrictions. You won’t have absolute protection from financial loss.

2. Identity Verification Tools Offered by Card Networks, Gateways, and Processors

There are several identity-verification tools that can be incorporated into the authorization process. These include:

  • Address Verification Service
  • Card security code verification (CVV2, CVC2, CID, etc.)
  • 3D Secure (Verified by Visa, Mastercard SecureCode, etc.)

Do these tools help manage malicious fraud?

Yes! These tools are specifically designed to detect malicious fraud. You can set rules and automatically decline transactions that are likely unauthorized.

Do these tools help manage friendly fraud?

These tools cannot identify friendly fraudsters. These tools help ensure the shopper is the cardholder – not a fraudster. But in cases of friendly fraud, the cardholder is the fraudster.

There is only one situation where these tools could help prevent friendly fraud – when Visa is assigning liability for allocation disputes. If you have a positive match from some or all of these tools, Visa should recognize that the dispute is invalid and assign liability to the issuer, not you.

If cardholders are disputing transactions as unauthorized, the results obtained through these identity-verification tools will help refute those cases of friendly fraud. However, if the claim is something other than fraud, these tools won’t be helpful.

3. Blacklists

A blacklist will alert you when a transaction is initiated by someone who has previously disputed a purchase.

Does this tool help manage malicious fraud?

A blacklist cannot stop a criminal from making a fraudulent purchase. By the time you receive the chargeback and add the account number to the blacklist, the issuer would have closed the account. There would no longer be a risk of criminal activity.

Does this tool help manage friendly fraud?

Yes! Most friendly fraudsters are repeat offenders–if they file one illegitimate chargeback, they will likely file another. This tool can help you cancel orders placed by confirmed friendly fraudsters so you can prevent chargebacks from happening.

4. Visa Merchant Purchase Inquiry (VMPI)

VMPI allows merchants to communicate with issuers in real time, providing information issuers need to “talk off” disputes.

Does this tool help manage malicious fraud?

This is a post-authorization tool. The transaction has already been processed by the time VMPI goes into effect. This tool cannot prevent malicious fraud from happening.

Does this tool help manage friendly fraud?

VMPI has the potential to be a very helpful prevention tool for friendly fraud. VMPI allows you to share more than 140 data fields with the issuer. The issuer can use this information to clarify the transaction and reduce the risk of accidental friendly fraud. Data can also be used to challenge attempts at intentional friendly fraud.

5. Chargeback Analytics

Chargeback analytics, broken down by different variables, can reveal why customers are charging back.

Does this tool help manage malicious fraud?

This tool can help prevent malicious fraud in a roundabout way. You obviously can’t use post-chargeback data to go back in time and terminate high-risk orders. However, tracing chargebacks to their source provides a lot of valuable insight. You can take that insight and feed it into your pre-sale fraud detection tool for future risk scoring.

Does this tool help manage friendly fraud?
Yes! Again, post-chargeback data can’t stop the dispute from happening. But it can tell you where your business is most vulnerable to friendly fraudsters. You can preemptively solve issues at their source and prevent future friendly fraud attacks.

6. Chargeback Responses Created by Third-Party Service Providers

A chargeback response is one of the last phases of the transaction journey. It challenges the cardholder’s claim and recovers lost revenue. Service providers can help create and submit these responses.

Does this tool help manage malicious fraud?

No, this tool is effective after a chargeback has been issued. It cannot detect and prevent fraud before an order is processed. Nor can it be used to respond to chargebacks resulting from malicious fraud–those chargebacks must be accepted as a loss.

Does this tool help manage friendly fraud?

Yes! A full-service tool should provide comprehensive management for friendly fraud. This would include applying ROI-optimized fight filters, collecting necessary compelling evidence, customizing each chargeback response, submitting fully-compliant cases, and recovering the maximum amount of revenue possible.

Creating a comprehensive risk management strategy

Unfortunately, there isn’t a silver bullet for risk management – no single tool will eliminate all fraud. And if you choose just one or two tools, you leave your business exposed to a lot of unnecessary risk and revenue loss. The best ROI comes from a comprehensive management approach that addresses both malicious and friendly fraud.

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Author: Corey Baggett

Corey Baggett is the CEO of Midigator, a chargeback management technology used in conjunction with fraud detection tools to create a comprehensive risk mitigation strategy. Midigator’s real-time reporting and automated chargeback responses remove the complexities of payment disputes so businesses can get back to business.