I have recently had two conversations about the topics of friendly fraud and loss, one from a merchant's perspective and another from a financial institution's issuer perspective. Friendly fraud is often used interchangeably with first-party fraud, as was the case in the conversations, but they are quite different. First-party, sometimes called "bust-out," fraud occurs when an individual applies for and receives a loan or credit line with no intention of ever making a payment. (The term "bust-out" comes from when the individual maxes out the credit, getting as much "free" stuff as possible and making no plans to pay.) First-party fraud is generally considered credit fraud and not payment fraud.
Friendly fraud occurs when a cardholder disputes a transaction that the cardholder never intended to pay even though products or services were properly rendered. Sometimes cardholders dispute legitimate transactions that they honestly do not recognize or remember—think of an annual recurring charge that might slip a cardholder's mind, or the merchant name on the statement is the parent company and not the more easily recognized d/b/a store name. If the resolution of such a dispute is such that either the merchant or issuer takes a loss, this is not true payment card fraud but should be classified as a loss rather than fraud.
The two conversations were clearly around friendly fraud and loss situations that are transaction fraud rather than credit account fraud. Both the merchant and financial institution claimed that friendly fraud and loss transactions are growing rapidly yet are not necessarily being properly captured or categorized. One of the organizations even went so far as to suggest that third-party card fraud is being greatly overstated because a significant portion of that fraud is actually friendly fraud and loss, and this mismeasurement is directing fraud discussions and mitigation decisions away from creating ways to better identify and mitigate friendly card fraud and loss.
So I issue a call to action for Take on Payments readers with multiple questions:
- What is your experience with friendly fraud and loss?
- Are you able to track these independently of third-party fraud?
- If so, are you seeing growth in friendly fraud and loss, as the merchant and financial institution stated was happening?
- What's the driving force in the friendly fraud and loss that you are experiencing?
- Does this particular fraud warrant more discussion by the industry, and in particular the Risk Forum, as it has not been an area of focus of ours relative to third-party card fraud?
Feel free to email me at douglas.a.king@atl.frb.org or use the comment button below. I would greatly value your thoughts on this topic.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed