Combatting Friendly Fraud Amid COVID-19

Payment disputes related to friendly fraud are expected to soar due to the pandemic-fueled surge in e-commerce. Card issuers, networks and processors are finding that consumer desire for contactless purchasing is making their traditional methods for managing disputes unsustainable.

New technologies, advanced analytics and redesigned processes can have a dramatic impact, but the industry has historically been slow to invest in back-office improvements. When an issuer does add technology, such as automation, to its current processes, it often ends up being a Band-Aid rather than a strategic solution with durable benefits made possible by rethinking the way we approach these claims.

COVID-19 has forced consumers to eliminate or scale back shopping trips, driving more day-to-day transactions to e-commerce. As a result, average transaction amounts are shrinking. With more retailers offering free shipping, shoppers no longer need to bundle purchases. Financial hardships, government restrictions and supply chain disruptions have changed buying patterns, causing Americans to cancel purchases, switch to substitute items and rethink subscription services.

These buying trends have upended the normal rules for settling disputes. More transactions lead to more claims, overwhelming call centers and creating backlogs. In addition to pandemic-related trends, transactions have become more abstract due to the rise of digital and in-app payment platforms. These options send transaction data through an additional party, putting an extra layer between the cardholder and the merchant.

This can lead to confusion as customers review their statements, often resulting in friendly fraud (when a purchaser disputes a legitimate charge). Shoppers may not recognize a transaction that’s been bundled by an alternate digital storefront or realize a family member has used their card. Claims that packages haven’t been delivered are difficult for most merchants to verify. Increasingly, consumers have found that contacting their credit card issuer is the easiest way to dispute a charge despite the relative ease with which these matters can be resolved directly with the merchant.

Just as merchants have made dramatic changes to retain customers this year, issuers must also move quickly to reduce friction in their dispute processes and improve the cardholder experience. We recommend investing in:

• Enriched transaction data and spend insights, allowing consumers to better recognize their purchases and providing a more direct route to resolve disputes with the merchant. Richer data also enables consumers to review refunds, shipments, cards on file and recurring expenditures. This increases customer confidence and prevents many disputes from ever being filed.
• Robust self-service tools for claims resolution, giving customers the ability to better understand the context of each transaction, communicate directly with merchants and, when needed, file a dispute claim with the issuer. This allows issuers to focus on the transactions that require intervention and provides ample time to do so within regulatory timelines.
• Customer service tools that allow representatives to resolve issues and capture high-quality data in the initial call, reducing both call times and the number of calls needed to gather dispute details.

Issuers will also need to consider a more intelligent approach to settle claims once they’re filed. Traditionally, they’ve treated dispute resolutions as a binary decision: if a charge is less than a certain amount, it will automatically be paid off, while any charge above the limit is investigated. But if an increasingly high percentage of transactions falls below, for example, $25, writing off all those transactions will quickly become a losing proposition.

Investing in predictive analytics and artificial intelligence will enable issuers to make smarter decisions by classifying disputes and routing them to the most efficient resolution methods. The ability to associate an event, such as a transaction swipe, with machine learning models can provide a data-driven view of disputes, dynamically evolving over time. Each disputed charge can be scored for the difficulty of resolution, replacing binary decision-making based on traditional write-off thresholds. Real-time insights, such as detecting repeat abusers, help to identify the probabilities of fraud and successful merchant payback, as well as recommend the next best action.

Issuers that watch claims, costs and complaints rise over the next few months shouldn’t expect to see any reversal in the trends accelerated by COVID-19. Customers that have flocked to options such as buying online for curbside pickup are unlikely to revert to old habits once the outbreak is controlled.

Credit card issuers need to provide consumers with the tools, information and mechanisms to better understand their payments and resolve disputes independently in a way that is more intuitive and easier and drives more satisfaction. They also must be able to harness the wealth of transaction data within their own walls to generate insights that can be employed to resolve fraud and dispute claims more efficiently.

A smarter approach to friendly fraud and disputes will deflect many claims and reduce costs, creating a more sustainable model for issuers going forward. This can also improve the relationships between cardholders, merchants and issuers as the shopping experience continues to become increasingly digital.

Authors:
Ryan Battles, Principal, EY Americas Financial Services Banking & Capital Markets, Ernst & Young LLP and Kathleen Calabro, Senior Manager, Ernst & Young LLP

The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.