Neil Smith is the Head of Issuer Sales & Partnerships, EMEA and APAC at Verifi. Here he shares with business chief the rise of fraud of digital goods.
“You wouldn’t steal a car,” ran the advert for an anti-piracy campaign comparing the crime with the unauthorised duplication and distribution of films and music.
Fast forward 15 years and it’s no longer just movies and music. “Digital goods” is now an all-encompassing term for anything intangible that exists in digital form – from online games and mobile applications to subscription services and electronic tickets.
Often, those downloading content or buying digital goods without authorisation are unaware they may be committing a criminal offence. In light of this challenge, the payments industry has added new terms to the lexicon on financial crime: “family fraud” and “friendly fraud”.
The first of these – family fraud – involves someone, often a child, making unauthorised payments on a parent’s account – typically an in-app purchase, but sometimes a physical item ordered from an online retailer. Friendly fraud applies to when the consumer makes a purchase online for a product or service with their credit card only to dispute the charge later, because they either don’t recognise the payment or forgot ever making the payment in the first place.
In a recent Javelin Strategy & Research report, sponsored by Verifi (the “Javelin Strategy & Research”), which focuses on the near- and long-term effects from chargebacks, it was found that nearly half of the chargebacks experienced by in-app digital goods merchants are thought to be the result of friendly fraud. The issue is especially challenging for merchants who offer purchases only in digital (or remote) channels, where friendly fraud is nearly 50% more prevalent than for physical-channels merchants.
The challenge when dealing with digital goods comes from the multiple choices of payment methods now available to consumers buying online. With so many payment options available, it can be easy for consumers to forget making a purchase. Multiple payment methods can add to consumer confusion, which in turn can lead to increased chargebacks.
In addition, not all payment providers have a well-defined process for dealing with chargebacks. A straw poll of the top 10 payment providers (according to Finance Online) shows that 40% don’t mention chargebacks anywhere in their FAQs or terms & conditions. From those providers that do, every process is different – with the majority opting to manage disputes internally between a consumer and merchant.
The problem is compounded by the nature of payments in digital goods. What makes digital goods fraud different from other card-not-present (CNP) fraud is that, in the case of the former, it is more difficult to discover the identity of the consumer. And because purchases are easier and faster to make, consumers are becoming more aware of fraud vulnerabilities in purchasing. This can lead to an increase in disputed transactions, often resulting in costly chargebacks.
Impact on merchants
When you combine the complexity of managing chargebacks specific to digital goods with the method of payment, merchants struggle to find the appropriate documentation to successfully represent the transaction. It has got to the point that merchants often have to rely on tenuous identifiers, such as email and IP addresses, to establish that the consumer in the disputed transaction is the one linked to the card account.
We found that 24% of merchants selling digital goods indicated that the inability to obtain the necessary documentation was the most common reason for their representation attempts failing, compared with just 16% for merchants who sell only physical goods.
Added to this is the reputational damage that occurs whenever a transaction goes wrong, resulting in merchants being overwhelmingly blamed for problem transactions – with 56% of consumers saying that it is the merchant’s responsibility in cases of fraud, and 66% in non-fraud cases. Compare this to the next highest group affected, the payment card issuer: these are blamed in only 25% of fraud and 15% of non-fraud disputes.
Impact on issuers
Up to 72% of digital goods merchants believe that consumers bypass them and directly dispute the transaction with their card issuer, compared to 64% of merchants who only sell physical goods.
This puts pressure on issuers and their capacity to cope with the volume of chargebacks, especially as related to peak retail periods such as year-end holidays, Black Friday, etc.
The easy solution for issuers is to accept the chargeback and offer a provisional credit to the consumer. However, there are two key factors in an issuer’s unwillingness to go forward with a chargeback. First is the pressure to remain “top of the mobile wallet”. With the ease at which consumers make purchases (thanks to one-factor authentication and autofill), there is an expectation that payment must be instantaneous and without complication. Anything but a seamless user experience will encourage a consumer to change their cache.
Secondly, regulatory pressure provides issuers with strong incentives to err on the side of caution – in short, favouring the consumer. Worryingly, in our research we found that more than one-quarter of issuers report that they do not track the number of transactions disputed by each account holder, leaving them vulnerable to friendly fraud perpetrated by individuals seeking to game the system. Among issuers who do not track serial disputers, the most prevalent rationale is that they do not wish to inconvenience consumers with the follow-up tracking that the process entails; in our research – 44% of issuers who do not track consumer chargeback frequency cite this as their reason for not doing so.
The collaboration solution
While a complete solution to family fraud and friendly fraud may seem far over the horizon, there is much that merchants and issuers can do to bring down the rate of chargebacks. New initiatives by Visa and Mastercard to enjoin merchants and issuers in collaborative effort to reduce disputes and mitigate fraud involve sharing of transaction data at the point of consumer enquiry. Third-party solutions already on the market further involve consumers by delivering to them merchant and transaction details, as provided by issuer digital channels. By involving all parties in payments – issuers, merchants, and consumers – the first, bold step toward reducing fraud and chargebacks can be made to benefit all involved, especially in providing an improved experience for consumers.
[1-10 “The Chargeback Triangle” – Javelin Strategy & Research, 2018.]