Stop Being So Friendly With Friendly Fraudsters

Banks are grappling with a mystery that is wasting their money. Why do so many people knowingly commit fraud by submitting chargeback disputes that are false, and why are bankers being so nice to these fraudsters?

According to Alloy’s latest State of Fraud Report, 14% of mid-market financial institutions reported that this kind of fraud — first-party/friendly/chargeback fraud — is the most frequent type at their bank or credit union.

Interestingly, recent research from Socure showed that 40% of Gen Z and 39% of millennials admitted to conducting “friendly fraud,” which means they received the goods and later disputed the charges with their card provider. These survey respondents were not broke college students. Many of the respondents were people earning more than $100,000 per year. Likewise, these people felt no regret, and 46% of the offenders said, “they view their actions as consumer advocacy,” according to the report.

We get it. These are bank customers. Your bank does not want them to have a bad experience when they challenge what could very well be a fraudulent charge. Cornerstone’s Performance Vault benchmarks show that debit card fraud consistently averages at 0.032% of purchase volume, and credit card fraud averages around 0.045% of purchase volume. So, the industry knows there are fraudsters stealing card numbers and rampantly committing fraud without physically having the card in their possession.

Moreover, our firm used to see that our institutions were successful in pinning about half of their card portfolio losses back onto the merchants. Now, with card-not-present transactions dominating the purchase volume, we are seeing these merchant recoveries fall well below 40%. This means that not only is overall fraud going up, but a bank’s share in eating that fraud is going up as well.

And yes, another key reason for friendly fraud is that someone else in the household bought something online and whoever pays the bills did not know about this purchase, so your bank needs to tread carefully in its investigations.

Still, that does not mean customers who go rogue and knowingly dispute legitimate purchases, therefore committing fraud, don’t exist. While it is hard to always determine if a customer is committing first-party fraud, banks need to become more aggressive with managing their “frequent flyers” who file many disputes each year.

Where to start? Determine what’s worth chasing. According to Socure’s study, which interviewed more than 2,000 Americans, only 17% of friendly fraud incidents involved amounts more than $500, while 59% of incidents exceeded $100. That leaves 41% of incidents that were below $100.

If your bank outsources your dispute management to your card processor, chances are that your bank is paying between $28 and $35 per dispute and may not recoup the money. From Cornerstone Advisors’ interviews of more than 60 bankers, most said they believed that the recoveries of these outsourced dispute services are below 20%. The outsourcing math tells bankers something loud and clear: Do not pursue any disputes under what you pay per investigation. In a recent Cornerstone roundtable of fraud investigators, most indicated that they do not investigate anything under $50 for their outsourced dispute processors.

However, many institutions are starting to warm to the idea to take disputes in-house. There are plenty of software vendors that automate the entire Reg E dispute process across debit card and automated clearing house payment channels, and who also offer Reg Z processes for those institutions that issue credit cards. By bringing the dispute process in-house, institutions can often lower their investigation threshold to $20.

If your bank outsources disputes, your bank also likely has a spreadsheet to track what it has sent over to its processor. Filter this spreadsheet for any customers who have filed more than three disputes in the past six months. If your bank uses a dispute management platform, it can pull a report with the same information. Look at these customers and incidents carefully and don’t be afraid to fire your frequent flyers.

Friendly fraud isn’t friendly. Your bank needs to become more stringent with disputed transactions, so your bank’s team understands that more and more Americans are justifying conducting this type of fraud as a way to manage regret or to “stick it to the man.”

Balancing customer service with tighter dispute investigation policies is challenging but needed.