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MAG Sponsor Spotlight: The 3 Types of Payment Fraud and How to Prevent Them (MAG Quarterly- Volume Seven, Issue Four)

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By Scott Stone, Chief Strategy Officer, Chargeback

December 5, 2019

To accurately prevent and respond to disputes, merchants must understand why a dispute happened. To do so, merchants can categorize payment fraud into three different types and learn how to prevent each kind of fraud. 

The Three Types of Payment Fraud 

Chargeback Fraud 
Chargeback fraud is the fraudulent request for a return or refund in the form of a chargeback. The cardholder disputes the transaction in an attempt to get their money back while retaining the product or services rendered. 

Friendly Fraud 
While it is closely related to chargeback fraud, friendly fraud involves no malicious intent from the cardholder. Forgetfulness, family members making unknown purchases, or unclear merchant descriptors can all be mistaken as “unrecognizable,” “unauthorized,” or “fraudulent” transactions. 

True Fraud
True fraud, also known as identity theft, begins with an acceptance of a stolen card. The actual cardholder disputes the fraudulent purchase. As a result, the card account is closed, and a new account number and card are issued to the true cardholder. 

Why Separate These Categories? 
By recognizing the three different types of fraud, you’re prepared to rectify profitable customer relationships and terminate risky ones. Without the distinction between friendly fraud and chargeback fraud, you’re putting potentially valuable customer relationships in danger. 

How to Prevent the Three Types of Payment Fraud 
While both chargeback fraud and friendly fraud are winnable disputes, if the merchant submits a compelling response with the correct evidence, merchants should still try to prevent disputes from ever happening. 

Customer service is key. If a customer has a problem, complaint, or question about the product, having excellent customer service will help resolve the issue before it ever becomes a dispute. When a problem goes unanswered or unresolved, customers may turn to disputing the charge to fix their problem. 
Have a clear and flexible return policy. Let your customer know exactly what your return policy is and how they can go about returning merchandise that doesn’t work for them. By having a more flexible return policy, customers will have more of an incentive to work with you while resolving the product return. Which is a much better scenario than customers using the dispute process as a way to receive a refund. 

Have clear merchant descriptors. The customer might review their credit card statement weeks after they made the purchase. So, they will need a clear reminder of what they bought. Make sure you’re displaying a recognizable company name (instead of a legal company name) in your merchant descriptor. Particularly, if it differs from what a customer will recognize. 

Also, include a way for cardholders to communicate with you. If a customer doesn’t recognize a transaction, they will initiate a dispute if they can’t immediately figure out how to contact the merchant. 

Put Preventive Technology in Place. The only way to stop true fraud disputes is to put front-end fraud filters in place to prevent the transaction from ever happening. To make the front-end fraud filters as accurate as possible, merchants should create a fraud feedback loop. By tracking transactions that turn into true fraud disputes, merchants can analyze those purchases and adjust their fraud filters as needed. 

Normally, friendly fraud and chargeback fraud could only be handled by responding to disputes after they were already submitted. With Real-time Resolution (RTR) merchants can prevent invalid disputes from ever being filed. RTR allows merchants to instantly communicate customer, order, and product detail to the cardholder’s issuing bank. This communication is a reminder for friendly fraudsters of what they purchased and a deterrent for chargeback fraudsters by giving the issuing bank all the information to determine the validity of a dispute. 

With a combination of front-end fraud filters, post-transaction dispute management, and feedback loop communication, your company will be in the best position possible to lower your dispute ratio, increase win rates, and save time.