“Friendly” and “chargeback” fraud

Post 10 of 11

Algocharge, payment gateway

One would think that only con artists or criminals commit fraudulent banking activities; if you are one, then keep on reading.

Banking institutions and merchants believed for many years that a fraudulent act is committed by a “third party”, one that is outside the circle of the actual transaction; however recent study shows that in 2012, $270 billion of fraud was accounted for “first party fraud”, also known as “friendly fraud” or “chargeback fraud”, which is a growing trend and is already 10 times more than “third party frauds”.

As a merchant services provider, we at AlgoCharge risk department are making exceptional efforts and succeeding to stay one step ahead in prevention of such fraud activities by making our merchants aware of them.

How ?

Friendly Fraud? Sounds a bit conflicting, how can fraud be friendly?

The term “friendly fraud” relates to clients denying a transaction ,to their credit card issuing banks, which usually happens when the investor “over invest” or finds himself deep in the red, action which leads to a “chargeback” to the merchant, in other words the merchant’s own client charges the merchant back for a transaction that he actually conducted.

Regardless of the fact that the merchant has a chance to respond to such chargeback and try and prove it was legitimate, the banks in most cases and without too many questions asked issue a refund to their customer and place a claim against the merchant for that “Charge Back” or also known as CHB for short.

Dealing with the financial markets, Binary and FOREX alike through online digital transactions, friendly fraud is a phenomena that mostly occurs by the investors themselves which claim that transactions or charges made by the investing firms on their behalf were un-authorized and not approved; Since the transaction created electronically and without an original signature on hand, the merchant’s chances to recover its loses are slim and at the end of the day the burden of proof is upon the merchant and not the client.

According to a 2012 statistics by LexisNexis every $1 of chargeback cost the merchant $2.70 in true cost and is counted as a lose.

Preventing or minimizing “friendly fraud”

We at AlgoCharge, acknowledge the high-risk markets that our merchants are facing, and by continued communication and knowledge sharing with our clients we take preventive measures before such friendly frauds show up as loses on the charts. AlgoCharge offers and conducts training sessions to its merchants as well as account mangers attention combined with merchant’s awareness which are needed to prevent fraud cases.

With all challenges in today’s market, there are some solutions that can help fight “first party fraud” and minimize Chargebacks.

The merchant should not only rely on a verbal or initial signed authorization by the investors, but also make sure to request a signed authorization for every transaction made, obtain a copy of the credit card as physical proof of the card and basic KYC on the client.

With today’s technology you can easily create an e-signature or voice verification signature to authorize and verify transactions.

Third generation device identification software can be used to identify the device (if it’s a PC, mobile device, tablet etc.) which the transaction initiated and in turn “attach it” to the investor as an ID method.

Such ID methods include cookie-less device identification, IP addresses, VPN, satellite and Geo-Location (origin) to locate and identify the device and its user.

This type of software can then be used in real-time to help drive risk management decisions during the authorization stage of a transaction, which helps to distinguish and identify inconsistent client behavior, and help screen customers by their behavior, and separate the routine from the risky.


What’s next…?

Since a Friendly fraud is difficult to prove or challenge with physical evidence due to electronic transactions method, it is also hard to understand; in order to realize the sizable loses merchants incur and the cost saving of preventing such fraud, there should be an industry-wide consensus and embedded mechanism to differentiate friendly fraud by smart applications of new technologies.

Until then, we at AlgoCharge, will continue to provide for the top risk management people and technology in the industry, as well as ways to lower loses and increase profits for our valuable clients.

To set up a training session, contact your Algocharge account manager


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This article was written by admin_algocharge