October 25, 2019

When companies are tackling fraud, it can be very difficult to distinguish between criminal fraud, friendly fraud, and legitimate disputes. The ability to quickly and accurately identify and segment fraud can help businesses reduce chargebacks, improve operations, and increase revenue.

Types of fraud

Kount provides a comprehensive payments fraud prevention platform to accurately uncover and address the following three types of fraud:

  • Criminal Fraud: Fraud from stolen credit card numbers or other types of financially malicious activity that result in chargebacks.
  • Friendly Fraud: Occurs when a consumer makes a purchase with their credit card and then disputes the charges with the issuing bank rather than requesting exchanges or refunds from the merchant. In some cases, the customer has malicious intent to dispute the payment and keep the goods or services, but more often, there may be a misunderstanding. For example, a consumer may not recognize a charge due to a confusing or cryptic billing descriptor, or they may have forgotten a spontaneous purchase, or the purchase was made by a family member.
  • Legitimate Disputes: Refers to authentic customer disputes and chargebacks resulting from these, for example, a product arrived damaged, late, or was misrepresented in sales materials, or perhaps it is missing a customer service phone number.

Addressing criminal fraud requires technology and tools that are often different from the ones necessary for detecting, segmenting, and addressing friendly fraud. Without a comprehensive fraud solution that includes a complete set of tools for addressing different types of fraud and use cases, businesses can face a confusing web of chargebacks that makes it difficult to isolate, identify, and stop specific types of fraud.

3 Types of Fraud

Prior to an advanced criminal fraud protection solution, fraud can be a confusing sea of chargebacks.

Identify criminal fraud

The first step is accurately identifying and protecting against criminal fraud. Kount accomplishes this this with an advanced AI solution that simulates an analyst’s instinct and experience to detect fraud. Using supervised and unsupervised machine learning, Kount distills transaction risk into a single safety rating, Omniscore, which detects more fraud and minimizes false positives. With Kount, digital businesses can significantly reduce criminal fraud, chargebacks, and manual reviews, as well as improve operations and increase revenue.

Once businesses have addressed criminal fraud, they can begin to focus on the remaining fraud. What remains is primarily friendly fraud, but there is also some criminal fraud and legitimate disputes. For a business with a strong criminal fraud prevention program, as much as 70% of their remaining chargebacks can be from legitimate customers, but come through with a “fraud” chargeback reason code. Criminal fraud models and business policies are ineffective at detecting or deflecting friendly fraud because anticipating the malicious intent of a customer makes it difficult to detect friendly fraud ahead of time. Of the remaining fraud, there is still a grey area where it is difficult to isolate friendly fraud from legitimate disputes.

The remaining fraud is typically 70% friendly fraud, 20% criminal fraud and 10% legitimate disputes:

Fraud Pie

By identifying the remaining fraud, business can gain insights into what generates the chargebacks.

Addressing Friendly Fraud

Kount’s Friendly Fraud Prevention Solution featuring VMPI has a complete set of tools to help businesses separate out the remaining unidentified fraud. Kount’s tools, including integration with Visa Merchant Purchase Inquiry (VMPI) services, advanced data analytics, and representment partnerships help businesses resolve the remaining fraud.

  1. VMPI — With Kount’s integration with VMPI, businesses can immediately begin to deflect friendly fraud chargebacks. VMPI helps issuers and businesses reduce unnecessary payment disputes by allowing issuing banks to request information from businesses to help cardholders recognize a transaction at the time of inquiry. The details provided by the business to the issuer can include information such as customer name, email, shipping address, mobile phone, shopping cart information, and device used. This additional friction is typically enough to remind the cardholder of the authorized purchase, or sway them from any potential exploitative intent, as they can see their own personal data, beyond just the payment information associated with the purchase.The VMPI integration feature further isolates some criminal fraud but can also help businesses recognize policy abuse that impacts their ROI, such as customers who are repeat policy abusers, e.g. “repeat returners.” This can be a problem for businesses who are known to be particularly customer friendly. With this insight, businesses can update their policies to prevent similar abuses in the future.
  2. Datamart Advanced Data Analytics — One of the unique advantages that Kount’s solution provides is the depth of data essential for sorting criminal from friendly fraud. Through Kount’s Datamart advanced data analytics and intelligence, businesses can see and analyze the remaining fraud by looking at qualifiers such as email address, product, and data types. They can sort through this data to isolate legitimate disputes from friendly fraud.Kount’s advanced data analytics is one of the key differentiators that Kount provides. This data can help businesses reach a point where they can take action and further reduce the impacts from fraud.
  3. Representment — After utilizing the toolset from Kount’s solution to accurately identify friendly fraud and its specific types, businesses can effectively use representment services either directly or through those provided by Kount’s partners. Fraud alerts and representment services are available to help businesses gain more information about a dispute in a faster way. Businesses can also use Kount’s own data to inform their analysis of a dispute situation and complete their own representment.

Legitimate Disputes / Operational Inefficiencies

Typically, a certain percentage of chargebacks is not caused by criminal or friendly fraud, but rather by operational inefficiencies. For example, these may include product quality problems, merchant mistakes, or service errors, etc. Perhaps there is a third-party shipper that is making mistakes. Is there a bug in the order process? Were items priced incorrectly, mis-shipped, or was there an inaccurate description in the catalog? Is there a gap between what is promised and customer expectations? There are even simple reasons for legitimate chargebacks such as the shipping invoice lacked a customer service number or return shipping instructions. Most businesses work really hard to identify and fix these operational inefficiencies, which often lead to increased revenue, higher margins, better customer satisfaction and user experience, and higher customer retention rates.

However, it is extremely hard to isolate these legitimate disputes, since they are frequently hidden in a sea of criminal and friendly fraud and chargebacks. Only by accurately isolating and addressing both friendly and criminal fraud, legitimate disputes can be identified and operational inefficiencies addressed. This is the “golden nugget” that every business strives to reach.

Without addressing criminal and friendly fraud, it is almost impossible to dive down a level in order to truly understand where and if there are broken links in the business.

Improving Business Outcomes

That is where a comprehensive solution such as Kount’s can make a big difference. Kount enables businesses to look beyond chargebacks, and also pinpoint how to improve the customer experience, margins and revenue. Once business challenges are untangled, merchants can address them to increase sales margins, improve user experience, customer satisfaction, and customer retention rates.


Want to learn more? Read more about friendly fraud: What is Friendly Fraud

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