Friendly fraud and the importance of a personalized user experience

Poor user experiences come with a high price tag in today’s digital marketplace. As digital banking, event ticketing and e-commerce traffic continues to grow, customers have more options than ever – and 88% of online customers are less likely to return to a website after a bad online experience.

But providing customers with a smooth and frustration-free user experience isn’t as easy as it sounds given the extra verification steps that many organizations require for security purposes. Improving the user experience without sacrificing layers of security is a difficult task, especially when it comes to ambiguous user behaviors like friendly fraud.

Friendly Fraud: A $20 Billion Problem

Friendly fraud (or first party fraud) occurs when a cardholder identifies a purchase on their transaction record as fraudulent and disputes it, initiating the chargeback process. Sounds innocent enough, right?

For some background, the chargeback system was established by the Fair Credit Billing Act of 1974 to protect customers from credit card fraud. And while the way we buy has evolved since 1974, the chargeback system has remained largely the same, creating loopholes that bad actors can exploit.

Friendly fraud is difficult for merchants to prevent as it may or may not be intentional. For example, imagine a scenario where a mother notices a series of small transactions on her bank statement that she doesn’t recognize. She sends a chargeback to her bank and claims that she did not authorize the purchases. What she doesn’t know is that her young son took her credit card off the kitchen table and used it to buy chips in a mobile game. If the bank fails to investigate the purchases, the creators of the mobile game will lose revenue on valid transactions.

But in a different scenario, the mother is splurging on a mobile game for her son. She overspends and issues a chargeback, falsely claiming that someone stole her credit card in order to get her money back. Without any background knowledge, these two scenarios seem similar to the bank. Both transactions are from a trusted user with a recognized credit card and a familiar IP address, and both occur at an unsuspecting time.

It’s gray areas like these that contributed to $20 billion in chargeback losses for e-commerce merchants in 2021 – and that already huge number is only growing.

Why context is key to solving friendly fraud

A seemingly rational response to friendly fraud is to add verification steps to every purchase. But this approach ignores the context behind each transaction. Today’s online customers are willing to accept friction in some situations, but reject it in others. The key to solving friendly fraud is to identify these situations and offer the appropriate amount of friction.

For example, if a customer wants to open a new bank account, they will probably feel comfortable providing their social security number during the first interaction. Here the customer understands that creating a bank account is a more complex process than buying a mobile application or paying for a bus ticket – and additional security measures are welcome. In fact, if the setup process is too simple, a new banking customer may worry about how easy it was to open an account with so little information and wonder if their data is secure.

Out-of-context friction will continue to be a problem unless merchants invest in new solutions. Delivering personalized user experiences is easier said than done, but smart friction can make it easier. And how can merchants deliver smart friction? By leveraging behavioral tools that can flag both normal and suspicious behavior.

How behavioral biometrics creates friction at the right time

Behavioral biometrics go beyond traditional security measures by creating user profiles based on inherent human behaviors, including a user’s keystroke rate, mouse movement, and average time spent on page website. These security tools work in the background, learning more about a user as they continue to interact with an online platform throughout the user journey.

In our example with the mother and her sneaky son, the behavioral tools would identify the behavioral differences between the mother and the son, such as their familiarity with the purchase form and the speed of entry, and flag the son’s attempted transaction. as risky for the trader. And if the mother is making the transaction, the tools would recognize that the purchase matches the profile of her past behaviors – from how quickly she enters her password to how many mistakes she makes while doing so. . If the merchant and the issuing bank share this information with each other, they can rebut the mother’s fraud allegations with a stronger basis.

Better communication between merchants and banks is essential to stem the problem of friendly fraud. Fraudsters are already communicating with each other through channels like the dark web about how to circumvent security measures. But with behavioral biometrics, merchants and banks have access to smart data they can use to fend off suspicious fraud allegations. They won’t disrupt the user experience unless they deem it necessary – and if they do, the friction they add will align with the context of the situation.

A consistent user experience attracts new customers and satisfies existing customers

An intuitive user experience opens the door to increased business and happier customers. But nefarious cybersecurity trends, such as friendly fraud, present obstacles that merchants and banks are still trying to figure out. Fortunately, behavioral biometrics can flag suspicious or ambiguous behavior during the chargeback process while allowing trusted customers to continue uninterrupted. This combination reduces merchant chargeback losses and provides customers with a smooth, personalized user journey.

Click here to learn more about how behavioral biometrics can prevent friendly fraud from NuData’s Michelle Hafner in our Making Sense of Online Identity video series.

Comments are closed.