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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

Take On Payments

October 16, 2017


No Magic Bullet for Preventing Data Breaches

Much has been written about the Equifax data breach, including a Take On Payments piece several weeks ago. Since the announcement of the breach in early September, my LinkedIn timeline has been filled with articles and messages from sales and development professionals claiming that their technologies and solutions could have prevented the Equifax breach. Unfortunately, the weakest leak isn't a technology problem or issue. It is, and will continue to be, the human element.

Before I hear from the sales and development professionals I just referred to, let me say that I believe that technology does play an important role in mitigating data breaches. For example, statistics show that homes equipped with a security system—"hard targets"—are significantly less likely to be burglarized than homes without them—"soft targets." I suspect the same is true for companies and data breaches in that those who do a better job of securing their data with technology are harder targets than those who do not. However, technology is only one aspect of preventing data breaches—which brings us back to the human element.

We are the weakest link. We architect and program security systems with flaws. We fail to properly update software or install patches on a timely basis. We open suspicious attachments on emails. We sometimes visit dubious websites and click on suspicious ads or links. We divulge too much information over social media. We share sensitive information with people we think we know and who we think are friendly. And we are mistake- and accident-prone. Education does and will continue to help, but humans will continue to make mistakes and be accident-prone, thus data breaches will remain an ongoing problem.

The late, great musician Tom Petty said, "Music is probably the only real magic I have encountered in my life. There's not some trick involved with it. It's pure and it's real." While Petty's remark that music is probably the only real magic is debatable, there is no debating that data breach prevention has no magic bullet. Educating people remains critical, but, as is all too often the case, education also ends up falling short. As a risk expert, I really wish that I had the answer to preventing data breaches. Unfortunately, human actions trump any answers that I might have. Given the grim outlook for data breaches, it is imperative for companies and individuals to have a plan in place to minimize the damage when a data breach occurs.

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

October 16, 2017 in consumer fraud, cybercrime, data security, identity theft, malware | Permalink

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July 24, 2017


FIDO Tightens Authentication's Leash

Our blog often covers user authentication challenges confronting financial institutions and merchants. We feel this topic is essential given that consumers are increasingly going online to make payments and their passwords tend to be weak. Financial institutions and merchants face a difficult balancing act. They must be confident that their authentication tools effectively confirm the legitimacy of the individual attempting a transaction, but they also have to make sure these tools don't create a bad experience for the customer.

A meeting in 2009 between a fingerprint-sensor manufacturer and a global, third-party payment provider to fingerprint-enable online payments quickly turned into a conversation on how to develop an industry standard for the general use of biometrics to identify online users. Ultimately, this meeting led to the formation of the FIDO (Fast IDentity Online) Alliance in 2012. FIDO currently has a global membership of more than 250 companies and agencies spanning the payments, mobile, PC, and transaction security industries.

FIDO's principal effort has been to develop a set of specifications and certifications covering consumer devices, mobile and web applications, and biometric authentication methods for e-commerce applications. Products certified to these authentication specs reduce password dependence, transaction friction, and stolen password attacks such as phishing, man-in-the middle attacks, and transaction replays.

FIDO initially focused on mobile devices—which allow authentication with the fingerprint sensor, microphone, and camera—and developed the Universal Authentication Framework. This framework provides enhanced security using public-key cryptography, with the keys and biometric templates remaining on the mobile device. The user goes through a device registration process that creates the biometric template and a cryptographic key pair on the device and registers only the public key with the online service. To perform a transaction, the customer uses one of the phone's biometric sensors to unlock the private key on the device.

To expand these strong cryptographic authentication capabilities to second-factor use cases on the web, FIDO established a second set of specifications known as FIDO U2F, or Universal Second Factor protocol. With this protocol, the user inserts a certified U2F device, also known as a security key, into a device's USB port or uses the device's Bluetooth or near-field communication features. The application running in a FIDO-compliant web browser first challenges the user for a password and then authenticates the user with the cryptographic private key on the U2F device.

Authentication of customers, especially on a remote basis, will always be a challenge as criminals find more and more ways to spoof identities. The industry's efforts to increase the security of remote payments remain ongoing and the cooperative work demonstrated by groups such as the FIDO Alliance plays an important part in that effort.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

July 24, 2017 in banks and banking, biometrics, consumer fraud, consumer protection, identity theft, innovation, mobile payments | Permalink

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June 12, 2017


Watching Your Behavior

Customer authentication has been at the core of the Retail Payments Risk Forum's payments risk education efforts from the beginning. We've stressed not only that there are legal and regulatory requirements for certain parties to "know your customer," but also that it is in the best interest of merchants and issuers to be sure that the party on the other end of a given transaction is who he or she claims to be and is authorized to perform that transaction. After all, if you allow a fraudster in, you have to expect that you or someone else will be defrauded. That said, we also know that performing this authentication, especially remotely, has several challenges.

The recently released 2017 Identity Fraud Study from Javelin Strategy & Research estimated that account takeover (ATO) fraud losses in 2016 amounted to $2.3 billion—a 61 percent increase over 2015's losses. (ATO fraud occurs when an unauthorized individual performs fraudulent transactions through a victim's account.) Additionally, new-account fraud on deposit and credit accounts has increased significantly and generated several public warnings from the FBI.

In payments, the balancing act between imposing additional customer authentication requirements and maintaining a positive, low-friction customer experience has always been a challenge. Retailers, especially online merchants, have been reluctant to add authentication modalities in their checkout process for fear that customers will abandon their shopping carts and move their purchase to another merchant with lower security requirements. Some merchants have recently introduced physical biometrics modalities such as fingerprint or facial recognition for online orders through mobile phones. Although these modalities have gained a high acceptance rate, they still require the consumer to actively participate in the authentication process.

Enter behavioral biometrics for online transactions. Behavioral biometrics develops a pattern of a user's unique, identifiable attributes from when the user is online at a merchant's website or using the merchant's proprietary mobile app. Attributes measured include such elements as typing speed, pressure on the keyboard, use of keyboard shortcuts, mouse movement, phone orientation, and screen navigation. Coupled with device fingerprinting for the customer's desktop, laptop, tablet, or mobile phone, behavioral biometrics gives the merchant and issuer a higher level of confidence in the customer's authenticity. Another benefit is that behavioral biometrics is passive—it is performed without the user's involvement, which eliminates additional friction in the overall customer experience. Proponents claim that while it takes several sessions to develop a strong user profile, they can often spot fraudsters' attempts because fraudsters often exhibit certain recognizable traits.

Behavioral biometrics is still fairly new to the market but over the last couple of years, some major online retailers have adopted it as an additional authentication tool. Like any of the physical biometric modalities, no single behavioral authentication methodology is a silver bullet, and multi-factor authentication is still recommended for moderate- and higher-risk transactions.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 12, 2017 in authentication, banks and banking, consumer fraud, fraud, mobile banking, payments | Permalink

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March 13, 2017


Phone Scams and Phishing

According to a recent report from the Anti-Phishing Working Group (APWG), more phishing attacks were recorded in 2016 than in any prior year since the group began monitoring in 2004. The APWG defines phishing as a criminal mechanism employing both social engineering, often through the use of email, and technical subterfuge to steal consumers' personal identity data and financial account credentials.

While phishing attempts through electronic channels are undoubtedly up, the telephone call remains a valuable tool for fraudsters. The Federal Trade Commission (FTC) just released its 2016 Consumer Sentinel Network Data Book and revealed that of the fraud-related complaints it received in 2016 with the method of initial contact reported, 77 percent of the respondents claimed that initial contact was made via telephone. Only 8 percent reported email as the method of initial contact. Thinking broadly about these reported trends by the APWG and the FTC, I have two observations:

  • No doubt phishing emails are a growing concern based on the data from the APWG. The FTC data just might reveal what I have been hearing for the last few years: the sophistication of phishing schemes is increasing each day. About 45 percent of the fraud complaints filed with the FTC did not report the method of initial contact. Maybe these individuals did not want to report that information. Or with the increasing sophistication of phishing emails, perhaps many of these individuals still do not realize that email was in fact the entrée for fraudsters to obtain payment, personal, or financial information. Educating the public and our employees to recognize phishing emails is vitally important.
  • Phone scams are likely to increase as chip-enabled EMV cards and their acceptance become more widely adopted, making it more difficult for fraudsters to conduct counterfeit card fraud. Look no further than the United Kingdom, where the Financial Fraud ActionUK's Fraud The Facts 2016 report notes that overall financial fraud increased by 26 percent from 2014 to 2015, due in large part to the growth of impersonation and deception scams. It further notes that these scams typically involve a phone call, text message, or email. With the FTC reporting a 40 percent increase in the number of fraud complaints from 2014 to 2016, with the telephone being the initial method of contact, it is imperative for individuals to carefully handle calls before providing sensitive information.

The Retail Payments Risk Forum often stresses the importance of consumer education, as fraudsters often see the consumer as a weak link. Education is critical to preventing individuals from falling for phishing emails or phone scams. We strongly encourage individuals to exercise caution before opening attachments within emails or sharing personal or financial information over the phone. And before making good on an unexpected payment request from an email or phone call, it's a great practice to directly reach out to the payee through a known legitimate email address or phone number. For more information about recognizing and handling telephone scams, visit this FTC web page.

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 13, 2017 in consumer fraud, consumer protection, phone fraud | Permalink

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October 17, 2016


EMV Comments That Make Me Cringe

Some aspects of the chip card implementation in the United States certainly make us frustrated. For one, the customer experience could be seen as slightly more negative because of the longer transaction time and confusion about the debit card selection menu. However, at several payments conferences I have attended recently, I have heard comments made by speakers and panelists about EMV chip cards and their technology that caused me to cringe a bit. I understand that a number of stakeholders are not proponents of EMV technology for a variety of reasons and, while some parts of their comments are factually accurate, they certainly are not "the truth, the whole truth and nothing but the truth."

Cringe #1: The United States is implementing 20-year-old-technology with EMV chip cards. Yes, the first EMV specifications were publicly released in 1995. But isn't that like saying that the gasoline-powered automobile is technology that is 130 years old? Microsoft's first release of Windows was in 1985. Do we hear complaints about it being 30-plus years old? The reality is that the EMV specifications, like practically all software development, are continually updated over the years with enhancements continuing as long as the software is still being supported. The EMV specifications are now at version 4.3, released in November 2011, with 20 supplemental bulletins issued since then and more on the way.

Cringe #2: EMV (chip) cards haven't solved the card-not-present (CNP) fraud problem. Again, this is an accurate statement. CNP card fraud is the second largest category of fraud losses in the U.S. (see the chart). But, the statement is misleading inasmuch as the EMV specifications and chip cards were never intended to address the CNP ecommerce environment. Counterfeit card fraud, whereby the criminal produces a card using data obtained from a skimmer or data breach, has been the number-one source of card-present fraud in the United States. It was this type of card fraud that the chip card was designed to target, and, from all accounts to date, it has been highly successful in doing so.

table-one

Source: Chip Cards in the United States: The PIN, PINless, Debit, Credit Conundrum, Aite Group, July 2016

Cringe #3 – Using a PIN improves the security of the chip card. While a cardholder using a PIN in lieu of a signature does clearly result in a lower level of fraud losses, the claim is somewhat of an apples and oranges comparison. The chip on the card authenticates the card itself, while the use of a PIN is intended to authenticate the cardholder performing the transaction. These are two separate types of authentication which, when combined, make the transaction more secure—a good thing. The use of a PIN should result in lower lost/stolen card fraud as it invokes two-factor authentication—something you have (card) and something you know (PIN).

Are the current EMV specifications perfect? Of course not, and that is why there are constant efforts to identify ways to improve them. But one must recall that the EMV specifications provide global interoperability and must be developed keeping that requirement in mind. What are your thoughts on the EMV specifications and how they can be improved?

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

October 17, 2016 in chip-and-pin, consumer fraud, consumer protection, EMV, fraud | Permalink

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Good stuff, Dave; I fully agree with your first 2 cringes, but on the third I think the objection is that if minimizing fraud is so important, why would we not complete the process of requiring PIN and take security to the next logical step?

Of course this opens up plenty of other debates- consumer choice, merchant fee levels, etc.- but thought it would be helpful to clarify that point in hopes of advancing the dialogue.

Posted by: Glen Sarvady | December 12, 2016 at 02:28 PM

Hello Dave,
While I agree with much that you have written.
The EMV specification has not kept pace with modern needs. The Target breach was the catalyst for the US implementation of EMV. Yet the current implementation of EMV would not have prevented the breach. The chip card exposes the static, clear text Primary Account Number (PAN) and other Personally Identifiable Information (PII) in numerous places. It does not cryptographically protect the sensitive data. To match our current needs, the cryptographic and computational power of the chip should be harnessed to protect the PAN and the PII. Or better yet, remove the PAN and PII from the chip card entirely.
The card is a physical token which should represent the PAN, but not expose it. The PAN should remain inside the Financial Institution (FI) linked to various tokens, each of which has a Device ID. The physical token should be authenticated without revealing the PAN to the merchant or a payment intermediary. Once the token (the Card or other access device) has been authenticated by the Issuer, it can look up the corresponding account and move (or not move) the funds accordingly.
When the card is capable of protecting itself, it can be issued, secured and validated by the issuer without the need for any intermediaries (consumers, merchants, processors, acquirers, networks) to participate in the protection process. With a proper chip card specification, this can be accomplished while maintaining global interoperability.
Respectfully,
Mimi Hart, MagTek

Posted by: Mimi Hart | December 9, 2016 at 03:11 PM

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August 15, 2016


The Personal Cost of Fraud

Last week's post by my colleague Doug King described the check fraud that took place after someone burglarized his wife's car and stole her wallet, including her driver's license and credit and debit cards. The frequency and magnitude of data breaches and constantly reading and researching payments fraud as part of my job have probably numbed me to the personal impact of fraud. When discussing the likelihood of becoming victims of some sort of identity theft fraud, we jokingly paraphrase the slogan in the South about termite infestations: "It's not a matter of if, it's a matter of when." Given the data breaches and information available through public records, we operate under the assumption that the criminal element has all the information they need to perpetrate fraud against us and, for those of us who haven't already been victimized, it is likely to happen in the near future. A pessimistic outlook for sure, but one I fear is realistic.

I still get frustrated when I see the many studies that show that, despite consumers' concern about the security and privacy of their transaction and personal information, the vast majority do not adopt strong security practices. They use easy-to-guess passwords or PINs and often use the same user ID and password for their various online accounts, from social media to online banking access. I believe that many financial institutions (FI) and ecommerce providers have passively supported this environment in that they often do not require customers to use stronger practices because they don't want to incur the customer service cost associated with password resets or customer abandonment. The lack of consistent password formatting structures adds to the confusion (some require special characters and others don't allow them).

I certainly don't hold myself out as the poster child for strong security, but our family has adopted a number of the recommended stronger security practices. These include using a simple compound password structure that creates a separate password for each application, creating a more complex password structure for financial applications, establishing filter rules designed to spot spam and phishing emails, and conducting a frequent review of financial accounts to spot unauthorized transactions.

While liability protection laws and regulations generally hold a consumer financially harmless, there clearly is a social and individual cost associated with fraud from the time spent dealing with law enforcement and FI representatives to the issue of not being able to access the funds fraudulently taken until reimbursement is made. Perhaps Doug's wife's requirement for her FI to provide a stronger level of authentication reflects a changing sense of the need by the general public for stronger security practices. I certainly hope so.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

August 15, 2016 in consumer fraud, cybercrime, data security, fraud, identity theft | Permalink

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David,

Great article highlighting the importance of a consumer experience that includes creating a trustworthy system. "Friction-less" transactions should not be the only driver in the equation. As well, friction has become an ambiguous over used term, that has yet to be measured or defined consistently.

New products in market now, offer low cost alternatives that protect consumers through a simple process, build trust in the system, while alleviating consumer fears and worries that their cards will be compromised. It's time for the industry to think about these solutions differently and change the paradigm. Rolling out a fraud prevention solution doesn't mean compromising the purchasing process. Instead it may actually help create greater consumer peace of mind.

Thank you, Maddy Aufseeser, CEO Tender Armor

Posted by: Maddy Aufseeser | August 16, 2016 at 12:26 PM

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April 11, 2016


Combat Gear for Tax Season

Recently, a local newspaper reported on two ex-bankers who were sentenced for their roles in a two-year-long fraud scheme. These ex-bankers created fraudulent bank accounts, then generated more than 2,000 false tax returns totaling more than $2.8 million in fraudulent refunds. The IRS has plenty more stories of tax fraud to tell.

Currently, "file taxes" is number one on my to-do list, and maybe yours. Do you shiver considering the possibility a tax return in your name has already been filed by someone else? Criminals, organized or not, know they can earn a living by filing fake returns. Even a legitimate taxpayer who owes taxes can be a victim of identity theft tax (IDT) refund fraud, as defined by the Internal Revenue Service's (IRS) Security Summit. (Note: The Electronic Tax Administration Advisory Committee, which reports to Congress, calls IDT refund fraud stolen identity refund fraud, or SIRF).

Formed on March 19, 2015, the Security Summit joins the IRS, state departments of revenue, and members of the tax refund ecosystem to discuss ways to combat IDT refund fraud. The Summit currently has seven working groups, including one focused on refund authentication and fraud detection. We have blogged before on the importance of data analytics in detecting fraudulent filings; this working group is attempting to strengthen these data tools. The working group also laid out best practices for software providers in enhancing identity requirements and strengthening validation procedures. At the end of last year, Congress provided a big assist in these efforts by passing the Protecting Americans from Tax Hikes, or PATH, Act of 2015, which closes one of the biggest loopholes in the tax refund process by requiring employers to electronically file W-2 forms and 1099 forms with the IRS by January 31 of each year instead of March 31. This new requirement, which becomes effective in 2017, will allow federal and state taxing authorities to match returns with actual W-2s for the first time.

The Security Summit also has a Financial Services Working Group, which explores ways to prevent criminals from using stolen identification credentials to establish financial services products such as checking accounts and prepaid cards that would allow the criminal to access the proceeds of fraudulent returns. After all, fraud may not be realized until after processing the tax return. Refunds are distributed either by check or direct deposit via ACH, which can be sent to a prepaid account (card) or traditional bank account. The IRS can't determine which account type an ACH refund is destined for since routing number and account number aren't standardized by account type, nor is there a database of routing numbers to identify prepaid accounts. Some have suggested that knowing when it is a prepaid account could be helpful in risk rating the return before sending the refund. The Financial Services Working Group has developed a standard state ACH file-naming convention so that state tax refunds can be identified by the industry in order to apply enhanced fraud filtering. Suspicious state tax refund deposits can be detected based on amounts, name matching, account type, length of relationship, and volume of deposits or withdrawals. The new format standard will strengthen fraud control systems in that all tax refund deposits will be able to be further scrutinized.

The Security Summit has a total of seven working groups, and they have their work cut out for them. While I shiver to think I could be a victim to identity theft, I support the progressive efforts to stop this crime, especially in the pre-filing and pre-refund stages so the criminals can't see a reward for their efforts.

Photo of Jessica Trundley By Jessica J. Trundley, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

April 11, 2016 in ACH, consumer fraud, fraud, identity theft | Permalink

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January 19, 2016


Mobile Wallets: Is This the Year?

In our 2015 year-end retrospective post, we commented on the slow pace of adoption of mobile payments despite the introduction of several major mobile wallets. While some consumer research continues to point to widespread consumer usage of mobile wallets in the coming years, we have seen similar projections from past research fail to materialize.

So what have been the major barriers to adopting mobile wallets? And for those who have adopted them, what functions are the most important? As I have noted before, I am a firm believer in former Intel CEO Andrew Grove's 10X rule: a new technology experience must be at least 10 times better than the previous method to achieve widespread consumer adoption and usage. A number of different elements—speed, cost, convenience, personalized experience, ease of use, and so on—can all contribute to achieve that 10X factor. Another critical element is the consumer's trust in the security of the wallet to ensure that payment credentials and transaction information will not be compromised in some way. The market research and strategy firm Chadwick Martin Bailey (CMB) conducted mobile wallet research in March–April 2015 on a nationally representative sample of smartphone owners and specifically asked mobile wallet nonusers what were their particular security concerns. As the chart shows, identity theft and the interception of personal information during the transaction were the top two reasons given.

Chart-1

The tokenization of payment credentials goes a long way to providing a higher level of security, but a major educational effort is required to relay this knowledge to consumers to increase their level of confidence. The CMB study found that 58 percent of nonusers would be somewhat or extremely likely to use a wallet if tokenization of their payment account information were performed.

But is it enough to convince consumers that mobile payments are more secure to significantly speed up adoption and usage? Mobile wallet proponents have been saying for years that the mobile wallet must deliver more than just a payment function, that it should include incorporate loyalty, couponing, identification, or other functions.

So if the desired end state is known, why is it taking so long for the mobile wallet providers to achieve that winning solution? The retailer consortium MCX is going into its fourth year of development and has just recently begun a pilot program of its CurrentC wallet in the Columbus, Ohio, market. Two of MCX's owners and major U.S. retailers, Walmart and Target, have announced in the last couple of months their plans to develop and operate their own mobile wallet. While these companies still profess their support of the MCX program, have they concluded that a common mobile wallet solution among competing retailers doesn't meet all their specific needs? Or is it a desire to offer their customers a wider choice of shopping experience options and differentiate their experience? Or is it another reason altogether? Only time will tell.

So do you believe that 2016 will be the year of the mobile wallet? Let us know what you think.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

January 19, 2016 in consumer fraud, contactless, identity theft, mobile payments | Permalink

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August 3, 2015


Friendly Fraud: Nothing to Smile About (Part 2)

Last week's post discussed the increasing frequency of friendly fraud and the problems it presents for e-commerce merchants. A transaction that could be classified as friendly fraud might actually be one the customer just forget about, or one involving a family member using the customer's card without permission, or one with the customer actually not receiving the goods. So the merchant really can't just assume the customer is out to commit fraud and take an aggressive approach in dealing with the customer. The merchant would probably then have lost the customer's business altogether. But with the burden of proof on the merchant, the merchant must adopt a number of best practices to help minimize losses.

A company that works with merchants to both prevent chargeback disputes and respond to them has published a detailed guide (the site requires e-mail registration for access to the guide) to help merchants deal with friendly fraud. The following list includes some of the guide's best practices:

  • Promote a clear and fair refund policy that encourages customers to contact the merchant directly instead of the card issuer.
  • Make sure that the name of the business is on all billing statements—clearly, to avoid confusion.
  • Ensure that the customer communication channels—such as a call center or e-mail—are accessible.
  • Be responsive to customer inquiries.
  • Clearly communicate shipping charges and delivery timeframes to avoid misunderstandings about the total cost or delivery date of orders.
  • Always obtain the card security code and use address validation services. For larger-value purchases, consider the use of delivery confirmation and other validation services.
  • With digital goods or services, consider using a secondary verification tool—an activation code or purchase confirmation page—to ascertain that the customer received the goods.
  • When there is a chargeback, make every effort to contact the customer directly to attempt to resolve the matter. While the contact may not resolve this particular situation, it may offer a lesson that might help prevent future chargebacks from other customers.
  • Keep a database of customers who initiate chargebacks that appear fraudulent. Research shows that customers who deliberately defraud merchants and succeed at it are very likely to do it again.

As with all efforts to fight payments fraud, merchants must study their own customer base. They should identify their particular risks and then employ the practices that will help them best mitigate their fraud losses.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

August 3, 2015 in cards, consumer fraud, fraud | Permalink

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July 27, 2015


Friendly Fraud: Nothing to Smile About (Part 1)

Friendly fraud (also referred to as chargeback fraud or first-party fraud) occurs when someone makes an online purchase then later requests a chargeback from the bank. The person has received the goods or services, but claims they were defective or the transaction never authorized. Sometimes this happens because of buyer's remorse—the customer just doesn't want to have to explain his or her regret to the merchant, preferring to initiate a chargeback and let the bank resolve it with the merchant. Sometimes the buyer's remorse comes from a child making purchases, particularly digital goods, using the parent's card, or when a merchant's refund time limit has passed but the cardholder still wants to be reimbursed.

While there certainly can be legitimate disputes, friendly fraud is becoming a growing problem for e-commerce merchants. Not only are the merchants out the cost of the goods or services, but they also incur administrative costs and fees from the card-issuing bank. Companies selling digital goods, office supplies, or electronics—as well as auction sites—seem to be the most frequent targets of friendly fraud, but other types of businesses can also be affected.

One of the main difficulties merchants experience in combating this fraud is predicting or recognizing when it first occurs, since it often occurs on the account of a "good" customer. And with these remote purchases, the merchant is at a disadvantage in determining if a legitimate cardholder made the purchase or the goods were actually received by the cardholder.

Because the burden of proof is on the merchant, the merchant community has started to implement a number of tactics to help reduce this increasing problem. In our next installment on this topic, we will discuss some of those tactics.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

July 27, 2015 in cards, consumer fraud, fraud | Permalink

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