'Friendly Fraud' A Growing Concern

By Ray Birch

ST. PETERSBURG, Fla.—As friendly fraud leads to more chargebacks during the pandemic, CUs will need to dig deeper into data to strike a balance between upsetting members, dealing with “friendly fraud,” and stopping crime, according to PSCU and CO-OP.

As CUToday.info has reported, the coronavirus pandemic has led to a massive increase in the ecommerce volume, as much as 40% since the country first went on lockdown. Now, experts are warning that same boom is generating a sharp increase in fraud and chargebacks, with some reports stating the spike is as high as 23%.

Jack Lynch, chief risk officer at PSCU and president of CU Recovery, shared similar findings from PSCU credit unions.

“We're seeing across all of our credit unions an overall trend of around 22% increase for chargebacks,” said Lynch. “We’re seeing this expansion in several merchant categories, but especially categories like travel, gym memberships and for non-receipt of goods.”

Lynch said many of these chargebacks are legitimate disputes members have regarding their travel plans that have been cancelled as a result of the pandemic. But he also said more members are also now committing so called “friendly fraud,” disputing charges as being fraudulent when in fact they made the purchase.

A ‘Real Struggle’

“In some cases it can be a real struggle—do you challenge your member and do a crime scene investigation when they call? That just goes against the whole concept of the member experience,” Lynch said. “But we know a lot of members don't have jobs right now and are looking back at what they spent…and wish they had not made some purchases. This can lead to some very tricky conversations. That's why this is a sticky problem, and you have to find a way to strike a balance.”

Jack Lynch

The resolution, suggests Lynch, lies in the credit union leveraging its own data, including accessing merchant data, so as to tactfully let members who are calling back and committing friendly fraud the credit union is deeply aware of the transaction’s details in order to give members a chance to withdraw the request themselves.

“You can say things like, ‘Are you sure you didn’t make that purchase, as we see it was made from your phone. Maybe it was your children who placed the order?’” said Lynch. “You can give them the chance to end the conversation themselves. We can have a better conversations this way, and not challenging conversations.”

Ways to Avoid Disputes

Lynch said PSCU is layering in much more transaction data to help credit unions better understand chargebacks, and noted there are systems in place to help issuers avoid disputes altogether.

“Sometimes you can go back to the merchant and see if they are willing to give a credit before it goes to the dispute process,” he said.

Lynch said credit union payment teams should have “rock-solid” talk tracks ready to address this growing issue.

“This, along with greater use of your data, will help tremendously,” he said. “Again, you do not want to  get into a crime scene investigation with members, because that never ends well for the credit union. I really think it's going to come down to data—the more data we are able to start bringing together the more effective the conversation we will have with members calling in with chargeback requests. This is important, because I just see this trend continuing until we get a better handle on e-commerce in general.”

The Need to Look Closer

Ashley Town

CO-OP Financial Services, too, is seeing a similar trendline.

“We have seen an increase in chargebacks, and expected that due to COVID-19,” Lori Kastrick, VP of industry and back office services, noting in May the CUSO saw an approximately 32% increase in chargeback volume. “Most of this is in the travel and entertainment sector, which is expected with the travel and vacation cancellations.”

CO-OP’s Ashley Town, director of fraud services, told CUToday.info the company is also seeing fraudsters attack the ecommerce channel with more frequency.

“While card not present fraud has always been prevalent in the industry, we have seen that fraudsters are using this channel in full force now. We have seen an increase in fraudulent activity at valid online merchants that supply resources for remote workers, BIN attacks, and fraudulent online charity sites for COVID-19,” she said. “With many consumers changing their mode to transact to online, some financial institutions may be struggling with trying to discern between valid and fraudulent activity. It’s important as we are evaluating transactions that we look past the transaction channel, but look closer at the merchant type and dollar amount.”