Very “Friendly” Fraud: Chargebacks and Promo Abuse
How real customers become fraudsters and what to do about it
An investigator from a new financial start-up shared a story with me a few years ago. Their marketing team was trying to get more new customers and announced a campaign where every new client who opened an account would get a $20 credit. As usual, the marketing team didn’t talk to the risk team and didn’t consider potential abuse issues. In a matter of days, they got hit with thousands of new sign-ups, after which new clients moved money out of the accounts immediately. The business learned what is promo fraud in a very efficient way.
Another way for customers to take advantage of the business is chargeback fraud. Some chargebacks are not malicious with customers committing “friendly” fraud, and disputing legitimate transactions, and others are examples of suspicious behavior with account takeovers and stolen identities. The difference is important for decision-making on how to prevent these types of fraud.
Friendly Fraud
A legitimate transaction dispute for a bad reason is called friendly fraud. A client doesn’t like an item bought, can’t recognize a charge, or deals with bad customer experience and cancels the charge. It happens on the bank level and merchants have no way to prevent it.
A company looks at the customer’s account and sees no suspicious patterns – no email/password updates, new IPs, or any other changes. There is no way to predict this behavior and it’s either accepting the loss or suspending the client’s account after multiple instances of abuse. Friendly fraud usually represents a majority of chargebacks that merchants have to deal with. Some investigators define friendly fraud as any chargebacks from known customers, whether intentional or by mistake.
Real Fraud
Real chargeback fraud happens when a charge was made by someone else who accessed the client’s account and now it’s disputed. The most common situation is account takeover. Investigators can see unusual changes in the customer’s behavior such as new names, emails, and passwords, changes to two-factor authentication, a new phone number on file, unusual IPs, especially from locations known for fraud rings, and mismatches between billing and shipping addresses. Unusually big or repeated small purchases are also good candidates for future chargebacks.
Fraud prevention in this case is usually rule-based and can range from manual reviews to automatic account suspension, additional identity verification, and a blacklist for repeated offenders. Credit card verification is needed for cases with stolen cards to help stop fraudulent transactions before they happen in the first place. In the case of account takeovers accessing the account, a customer is usually a victim.
Promo Deals Abuse
Promotion fraud happens when people take advantage of promo codes, signup bonuses, referrals, discounts, coupons, or any other marketing tools. Social media and forums are filled with groups and discussions about how to get maximum from promo deals, circumvent, and exploit the system. One of the most prominent examples was a 4.5 million account bot farm that took advantage of PayPal’s sign-up rewards last year which led to a massive share price drop.
Promo deal abuse is often a variation of friendly fraud when customers find a way to bend the rules. The best way to deal with promo fraud is to manage customers' behavior, for example, by putting restrictions on multiple accounts on one device or monitoring the code redemption activity.
