So-called “friendly fraud” — in which consumers or customers take advantage of gaps in online processes — is a growing and costly problem that often evades detection, analysts say. 

Also known as first-party fraud, retailers call it friendly fraud because it refers to buyers who aren’t career criminals but nevertheless exploit an inefficient process to gain advantage over a retailer, CFO Dive previously reported. A customer may, for example, dispute an electronic Automated Clearing House or credit card payment despite having initiated it themselves. For credit card transactions, where the liability sits with the merchant, and ACH payments, it’s very easy for customers to initiate a dispute.

“It's very easy to just say, ‘Hey, I didn't do that,’ and they return the ACH,” or credit card payment,” Donna Turner, advisor in residence at EY, said at a virtual event hosted Wednesday by tech firm Unit21.

Such scams are fairly common: an October study by tech firm Socure found that nearly a third of American consumers admitted to committing some form of first-party fraud.

Turner describes first-party fraud as instances where the user or purchaser of the good or service claims the transaction was unauthorized in an attempt to avoid accountability for repayment. She estimates that about 75% of the chargeback requests merchants receive are friendly fraud. (Third-party fraud occurs when a customer’s identity details are used by scammers without their permission; and instances of second-party fraud can take place when a consumer willingly gives their information to a fraudster.)

An increase in friendly fraud may be in part due to pressure on some consumers’ financial circumstances. “Especially as the economy tightens and people are tighter on money [there is] some intentional overspend and overleveraging of credit,” said Scott Harkey, executive vice president of financial services and payments at software firm Endava. 

Socure’s research backs up this point: It found that around a third (34%) of those who committed fraud said they did so due to economic hardship.

CFO considerations

According to research cited by Mastercard, first-party fraud costs merchants $50 billion per year.  An increase in friendly fraud presents financial as well as reputational risks: If a firm blocks a transaction it considers fraudulent, it risks undermining the company’s public image, as customers can complain on social media in an attempt to tarnish the company’s reputation.

“First-party fraud poses a significant risk for CFOs due to potential financial, operational, and reputational challenges,” said banking consultant Hailey Windham. “Unlike third-party fraud, where an external party exploits the system, first-party fraud refers to fraudulent activities where the perpetrator is the customer or the account holder — the chameleon of fraud schemes.”

First-party fraud poses a significant risk for CFOs because of the potentially hidden impact, even though they are often a significant component of fraud losses. 

“We have seen first-party fraud losses in the range of 30% to 40% of total net fraud losses when they are accounted for,” said Windham.

Defensive strategies

A strategy to address first-party fraud, according to Windham, involves the use of analytics — including predictive modeling and anomaly detection capabilities — combined with robust internal controls.

These tools should be able to detect unusual patterns, including use of multiple lines of credit, which, in turn, can generate follow-up inquiries with a consumer if questions arise, said Harkey.

“We're going to finally see this convergence of technology on the financial services side…t's going to log what's happening on the merchant,” said Turner.  “You're going to start to see more user friction,” instead of automatic acceptance of all chargeback requests.

Given the role online sales can play in fueling friendly fraud, CFOs are faced with two challenges: helping the executive team find a way to stem losses and identifying and resolving the kind of damage it can do to performance tracking.

In efforts to stamp out this type of fraud, companies need to perform a balancing act of investing in the right tools, without impacting operations and valid customer transactions, said Turner.

Companies, argued Turner, need to weigh the investment required for anti-fraud tools against the impact of potential losses that could result from first-party fraud.