Financial fraud management is crucial to companies that process, offer, or receive electronic payments. The costs of financial fraud can involve several players: from businesses, and consumers themselves, to payment gateways, credit card issuers, and others. Recently, our payments practice area at Americas Market Intelligence (AMI) got together with key players in the sector at an AMI Payments Coffee Chat to discuss a specific type of financial fraud known as friendly fraud.
This type of fraud is committed by the cardholder unintentionally or in good faith. For example, the cardholder may suddenly regret a purchase and request a chargeback. They may request a chargeback for a real transaction that they simply do not recall making, or perhaps a child took her mom’s cell phone and made an unintentional purchase or in her favorite game.
Because of the nature of this kind of “fraud,” it can even affect companies with high standards of financial security. “The pandemic brought with it new players, in terms of both businesses and consumers, with different levels of knowledge and tools. This, combined with an increase in the number of transactions not made in person, had an impact on fraud, and even on friendly fraud,” says Natalia Hernández, senior payment practices consultant at AMI.
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The Context of Financial Fraud in Latin America
According to AMI’s analyses and research, between 2019 and 2021, Latin America saw a 23% increase in fraudulent attacks, which is also consistent with the growth of electronic commerce in the region, which was close to 31% in 2021. The graph below shows the comparison between both trends.
Friendly Fraud in the Context of Regional E-Commerce
Raúl Ferro, vice-president of Ethoca by Mastercard, who was on the panel of experts invited to the AMI Coffee Chat, noted the frictions between consumers, businesses, and suppliers that have led to increased fraud in Latin America. Studies show that at least 77% of people have trouble recognizing a transaction on their bank statement, but this friction is barely the first link in the chain of friendly fraud. Later on, the consumer often contacts the card issuer. In this respect, it has been found that at least one in every four disputes dealt with by telephone turn out to be because of confusion in the description of transactions.
In the absence of an effective mitigation system for friendly fraud, the rate of chargeback processes is high and expensive for all those involved in the chain of payments, as it involves the various players in the transaction process, unlike a refund, which businesses can do directly.
The data are striking: an estimated 50% of chargebacks in online businesses are friendly fraud. Chargebacks mean involving the issuing bank, the acquiring bank, the credit-card network, and the business. Times can vary depending on appeals or arbitration applications. At the AMI Payments Coffee Chat, panelists discussed the financial and operational costs associated with chargebacks, as well as the fees, which may exceed even the value of the original transaction. The burden of the costs is usually borne by the business and the card issuer.
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Recommended Strategies for Mitigating Friendly Fraud
This AMI Payments Coffee Chat explored solutions like Ethoca by Mastercard, a network that facilitates collaboration between banks and businesses to reduce friendly fraud and consumer disputes, recover lost profits resulting from fraud, and accept more transactions. The service Consumer Clarity, for example, allows the cardholder access to detailed digital receipts in order to corroborate their transactions. The bank can access the information of the businesses where the purchases were made, so in the banking app it can display the name and logo of the business in the transactions history, and this facilitates the user experience and prevents confusion by making it easier to recognize which business the transaction relates to. In turn, the user has access to detailed information about each transaction, which is based on research about what consumers are most confused by after making a purchase or during the claims process.
Ethoca also has a service of alerts in which businesses are immediately informed about confirmed cases of fraud, or disputes that consumers have filed with their banks. By providing a timely alert, businesses can expedite a refund process and avoid chargebacks. In addition, collaboration through Ethoca includes integration with other major channels, such as the call centers and back offices of issuing banks, in order to improve customer service and reduce the number of disputes.
According to Raúl Ferro, one of the key points of Ethoca is its integration with banking apps to display the logos of businesses. “The logo helps to expand brand presence. It provides clarity and immediate recognition of transactions. This lifts the consumer experience and helps reduce the rate of claims,” says the expert.
All this and more was discussed at the Payments Coffee Chat about friendly fraud. For access to the full presentation shared in the Chat, click on the image below.
We also invite you to register for AMI Payments Coffee Chats to get the latest first-hand knowledge about the payments sector in Latin America.
Moving beyond Chats
Contact us if you need detailed research on aspects of financial fraud in specific Latin American markets or the region as a whole. Americas Market Intelligence can design and implement a personalized study focusing on solutions to enable your company to minimize risks or expand its opportunities for success. Aside from friendly fraud, our market intelligence team can help you with research on many other relevant topics of the payments sector in Latin America, including cryptocurrencies, buy-now-pay-later, e-commerce, payment methods between consumers and SMBs, mobile wallets, ACH, open banking, and much more.