Friendly Fraud - The Best Defense is a Good Offense

Recently, I read an article in the Wall Street Journal about 'Friendly Fraud.'

Previously, I've written some documents about the many ways that our customers use Tealeaf data and services to help fight fraud -- however, I must admit that I hadn't spent much time thinking about a supposedly “friendly” form of fraud.

Wikipedia defines Friendly Fraud as:

Friendly fraud (also known as friendly fraud chargeback) is a credit card industry term used to describe a consumer who makes an Internet purchase with his/her own credit card and then issues a chargeback through his/her card provider after receiving the goods or services. When a chargeback occurs, the merchant will always be responsible, regardless of what the they did to verify the transaction. The challenge with friendly fraud is that there is no way to verify the authenticity of the transaction, which is in fact legitimate, because the consumer is the one that is not legitimate.'

According to the Merchant Risk Council, an association that counts leading retailers as members, The average retailer loses 1.1 to 1.5% of revenue due to online fraud.

While you could look at the monetary impact of exchanging crisp dollar bills for 99 pennies and rationalize the missing penny as a cost of doing business -- the potential impact is far too great to ignore:

• If you get too many chargebacks, the banks will take away your credit card rights. No credit cards, no online business. Game over.
• If you are selling a perishable commodity, i.e. an airline ticket, a chargeback costs you the goods and the revenue -- you can't recover the seat on the flight.

I don't see anything friendly about 'Friendly Fraud' -- or any other form of fraud -- so let's talk about how to take action:

1. You can't wait until chargebacks to occur to do something. You need to be proactive.
2. You are not alone, fraud is an industry wide problem -- participating in groups like the Merchant Risk Council and sharing stories and expertise can help.
3. In order to begin the process of slowing down 'Friendly Fraud', you need to record and monitor all online behavior. 

Visibility is the equalizer: Insight into the actions that are taking place

• You can't monitor what you can't measure.
• You can't solve what you can't see: from browser to purchase to shipped goods.
• You don't know what the blinds spots are

How can Tealeaf Help?

By capturing every single customer's visit (as well as the reaction of the site in response to the customer's requests), you have visibility into the complete picture and details of every single interaction so you can:

• Resolve customer disputes quickly and easily by having a permanent, archived and instantly replayable record of all critical online transactions (e.g., all trades, all purchases, etc.)
• Retain a complete record of every single interaction made by an online customer for ongoing audit and record-keeping purposes.
• Review and examine previous customer interactions without requiring technical skills or IT services.

The Payback is in the Playback

With visibility into the transaction you can immediately determine  whether to contest or not? Our customers long ago coined a “catchphrase" about our solution: “The payback is in the playback” –  in this use case, can you see whether the chargeback or disputed purchase is valid? In some cases, the customer is right – how do you know what the customer saw and did?

Don’t just review the order -- but their visits before and after. One of our customers allows their customers to buy and/or sell options on stocks. When they get an online dispute -- with the customer saying that they didn't know that they were trading on 'margin' -- they look at much more than the transaction itself -- they look at the previous online sessions and the follow on sessions. When they see that the customer checked the order status repeatedly -- and only after the market conditions soured -- that the customer complained -- they know who's telling the truth.

Identify Fraudulent Behavior Across Visits

Use forensics to find related sessions. Despite your best intentions, bad things will happen. You may get a chargeback from a particular user. With Tealeaf -- you can search for sessions not just by user name, but by phone number, IP address or anything in the session as a pivot. This allows you to find other occurrences that may have slipped through. You can also create rules to event on these observations in real time -- to add a loss prevention team.

• Use historical data to build/test data mining models, adjust. Since we record everything, the historical data can easily be parametrically extracted (i.e. via a search constraint).
• Review Orders (Loss Prevention). Some of our leading retail customers regularly review online orders prior to shipping to look for unusual patterns.
• Review all chargebacks -- sift. Look for common patterns and trends. Tealeaf enables really powerful ad-hoc segmentation, enabling you to look for anything that occurred during a transaction, or across segments of transactions. This capability to “pattern match” (without having to know in advance what you might want to look for)  allows you to quickly search for the sessions of any user with a chargeback, or all the sessions of any given user who claims a chargeback, to understand true intent, or their personal history with your company (i.e., is this a one-time event or a pattern of behavior), and also allows you to scope the extent of the issues, and associated dollars affected.
• Share -- Do you share 'bad people' profiles with your fellow merchants
• Document -- be able to cooperate with law enforcement – an easy to understand format – actual visualization is so much more powerful than log data, and tells the complete story. With Tealeaf, you can preserve individual sessions for prosecution.

The cost of prevention can't be more than the cost of the problem. At one extreme, you can prevent friendly fraud by disallowing online orders. Obviously, that wouldn't be a popular solution in today's world.

At the same time, any solution has to have a TCO that is well less than cost of the problem. Tealeaf supports variable archiving -- the ability to selectively preserve a percentage of sessions indefinitely -- i.e. keep all traffic for 30 days -- but keep all orders for 120 days.

This cuts down on the storage component costs -- while still yielding high utility value of the data.

In these uncertain economic times, the only certainty is that unscrupulous activity like 'Friendly Fraud' will continue. The best defense is a good offense, the time to act is now, and the best solution is visibility.

by: Robert Wenig, Founder and CTO