Strategies and Tools to Prevent Friendly Fraud in 2024

First party fraud is often somewhat ironically called friendly fraud. The reality is that it’s anything but friendly for merchants.

According to Mastercard’s data, first party fraud can cost merchants as much as $50 billion a year. It’s also not limited to being carried out by fraudsters and fraud rings like many other prevalent fraud vectors either. More than a third of Americans said they have used their own identity to commit a fraud for financial gain in a 2023 survey.

There are many types of first-party fraud and the ways it can happen are growing as new shopping and financial service options reach the market. To combat first-party fraud and eliminate as many losses as possible, you need to know how it happens today and what tools and strategies exist to mitigate it. That’s exactly what we’ll dive into in this blog post.

Types of friendly fraud

Friendly frauds take advantage of specific benefits or services available to customers that assume they’re being honest if they’ve suffered a loss. Unfortunately, that leaves a door open for bad actors to abuse them in a handful of ways. Each friendly fraud scam takes advantage of the specific characteristics of the medium it’s happening in and the organization it’s victimizing.

Friendly fraud against merchants

Chargeback fraud/cyber shoplifting: Chargeback fraud occurs when a customer makes a legitimate purchase but then disputes the charge without any intention of returning or paying for the item. “Chargeback” refers to the process where a customer buys something from a merchant then files a claim with their bank or credit card company, alleging that they didn’t receive the purchased item, it wasn’t as described, or they didn’t authorize the transaction. The bank investigates, reverses the transaction, and the customer retains the funds.

Refund and promotion abuse: Some customers exploit return and promotion policies to avoid paying full price. Often, they create multiple accounts to repeatedly claim discounts or promotions for a single purchase. Though seemingly minor, this fraud costs merchants an estimated $89 billion.

Wardrobing: Wardrobing is purchasing items, using them once or twice, and then returning them for a full refund. Common with items for special occasions, like formal attire, the customer returns the item shortly after the event. Even if the item remains in good condition, it can’t be resold as new, and retailers incur additional costs for cleaning before reselling.

Buyer-seller collusion: This type of fraud involves a buyer and seller conspiring to commit fraud that benefits one or both financially. In some cases, “customers” post fake positive reviews to boost a fraudulent seller. In others, both parties falsely claim a shipment was lost and request a refund. They might also collaborate to fix prices, defrauding buyers not part of the collusion.

Friendly fraud against financial institutions

Application fraud and fake accounts: Application fraud is when an individual uses false or stolen information to apply for credit cards, loans, or mortgages. Despite using another person’s details, it qualifies as first-party fraud because the fraudster is the applicant.

Bust-out fraud: Bust-out fraud is a sophisticated form of first-party fraud often orchestrated by crime rings. Fraudsters apply for numerous credit lines using stolen or synthetic identities. Initially, they mimic legitimate customers by making timely payments, thereby building good credit and gaining access to more credit lines. Eventually, they max out all available credit within a short period, leaving lenders with substantial defaults and losses. Due to the scam’s scale and the good credit maintained by the fraudsters, bust-out fraud is particularly damaging to lenders.

Money mules: Fraudsters recruit money mules to transfer stolen or illegal funds, often without the mule’s knowledge of the scheme. The mules might believe they’re engaging in legitimate work and receive a small fee or percentage of the transferred amount.

Statistics on the business impacts of friendly fraud in 2024

The best way to paint the picture of the scale of modern friendly fraud is through the numbers:
• Visa estimates that friendly fraud can account for up to 75% of all chargebacks.
• Chargebacks cost about $3.60 per dollar lost in direct fraud costs.
• Mastercard estimates as much as 70% of all credit card fraud is friendly fraud.
• Friendly fraud is rising at a yearly rate of 33% according to Signifyd data.
• Datos insights forecasts a 40% rise in card disputes tied to friendly fraud by 2026.
• 1 in 4 customers openly admit to engaging in chargeback friendly fraud according to Enigma.
• Chargeback friendly fraud is expected to cost merchants $28.1 billion by 2026.

Strategies and tools to combat friendly fraud in 2024

As a rule, merchants combatting friendly fraud should strengthen their return policy and train customer service teams to recognize friendly fraud signals. But the true difference maker for fighting friendly fraud is revisiting and enhancing the overall fraud prevention strategies and platform the merchant uses is equally important.

DataVisor, a leading AI-powered fraud and risk platform, offers robust solutions to help retailers combat fraud on a large scale. By providing real-time detailed data analysis on every transaction, DataVisor identifies links between entities, tracks past transactions, and monitors user behaviors to detect repeat offenders. The platform’s intuitive visualization models explain the “why” behind its findings, allowing retailers to address potential fraud immediately.

The impact DataVisor’s fraud detection solution brings is significant, with a 20% uplift in fraud detection, 94% detection accuracy, and an average of $15 million in annual savings from end-to-end fraud prevention. From mitigating creation of fake or duplicate accounts at registration to monitoring customer return histories, DataVisor seamlessly integrates with your existing systems, delivering value from day one.

Discover how to effectively prevent policy abuse and friendly fraud at its source by booking a customized demo with our team today.