Putting the “friendly” back in friendly fraud

COVID-19 has been the impetus for many changes in consumer behavior, including a migration from in-person to online purchases – a shift that has resulted in an increase in fraud disputes. One specific type of fraud, known as “friendly fraud,” has become a significant challenge for credit unions and other financial institutions.

What is friendly fraud?
The name is deceiving. Given friendly fraud costs the industry millions of dollars every year, it is actually far from “friendly.” Expenses incurred not only include the fraud loss itself, but also the time and cost of processing the fraud, as well as the negative impact on the member experience.

Friendly fraud is committed when an individual has knowledge of and/or benefits in some way from a transaction on his or her account, despite reporting it to be fraud. In practice, this translates into a cardholder looking to get money back from a legitimate transaction by making a dispute claim. If he or she is able to successfully convince the card issuer that actual fraud has occurred, the cardholder will ultimately receive a refund.

Why is it challenging to address?
There are some trends and unique challenges associated with uncovering and addressing friendly fraud:

• Friendly fraud rates continue to increase with certain purchase categories like digital goods, where it accounts for the vast majority of all fraudulent activity. 
• Today’s consumers have become more aware of the disputes process. Some consumers use this knowledge to leverage the disputes process in order to recoup funds. 
• Given credit unions’ focus on the member experience, friendly fraud claims that fall in a gray area of disputes become especially challenging. Credit unions risk losing a good member over a rejection of a disputes claim if it is not friendly fraud, or even after they agree something is not fraud and really just a disagreement with the merchant. Many members simply expect their trusted credit union partner to make it right regardless of the specific circumstances. 
• Sometimes what appears to be friendly fraud may be an instance of a cardholder disputing a transaction he or she is not aware was a legitimate transaction. The cardholder could have either forgotten about the purchase, or the purchase could have been a built-in or reoccurring payment. It could have even been made by someone else with access to the card without his or her knowledge – a spouse or child, for example. Treating all calls disputing transactions as if they are under investigation for attempted fraud is not a great way to retain good members in the long term.

What should credit unions do?
There are several areas on which credit unions should focus when it comes to friendly fraud:

• In these challenging times, it is more important than ever to have a plan in place to address the rise in friendly fraud. At PSCU, the disputes support team is constantly looking at ways to address friendly fraud while ensuring they keep the member experience and perspective top of mind.
• As more and more transactions move online, technology should be leveraged to help in the investigation of every fraud case. PSCU continues to introduce new technology and use transaction data to help understand the dispute and work with cardholders to resolve it. In addition, prior to even moving into the disputes process, we explore the possibility of issuing credits by leveraging our partnerships with merchants. This option provides immediate member satisfaction and ends the disputes process altogether, and it has saved our Owner credit unions millions of dollars each year in fraud costs while simultaneously improving the member experience.
• Education is key. In many instances, cardholders call their credit union because they see something on their bill they do not immediately recognize. Credit union staff need to be educated on the process and regulations of working through these types of disputes, as well as on the service skills necessary to talk through transactions with the member. In many cases, members will have an “ah ha” moment and realize they did actually make the purchase in question, or that it was a legitimate purchase – not friendly fraud at all. 

For credit unions that are interested in creating a customized disputes program, PSCU offers additional capabilities through its Enhanced Fraud Services solution that enable credit unions to drill down in more complex disputes challenges like friendly fraud. This includes reviewing claims history and taking a deeper dive into purchasing data with the member that helps move cases from fraud to a non-fraud dispute or completely withdrawing the dispute case.

COVID-19 has created many challenges, including when it comes to cardholder disputes. As friendly fraud activity increases, credit unions must continually look at updating technology, as well as educating their employees on the ever changing landscape, regulations and fraudulent activity in the disputes process.