Friendly Debit Card Fraud Claims: Keeping Things Friendly with Your Customers

This blog is a “how to” follow up to Friendly Fraud: Legitimate Dispute or Just Bad Scallops?

Debit card chargebacks are for your customer’s benefit to protect them from unfair merchant practices, but they are increasingly being misused by consumers. This misuse is referred to as “friendly fraud.” 

Do your customer-facing staff understand the difference between debit card fraud, a dispute and friendly fraud? Not knowing the difference may be costing your financial institution unnecessary charge-offs.

Distinguishing the right kind of claim

There is a big difference between fraud and a payment dispute, which is often friendly fraud. 

The first step in the dispute claim process should be to engage the customer in a conversation about the transaction. Friendly fraud starts off as a legitimate purchase. Ask two key questions of the customer.

1. Why do you think the transaction is incorrect or even possibly fraudulent? 

Example 1: The customer didn’t get what they thought they ordered or the debit was more than anticipated. 

• The best course of action is for the customer to be advised to contact the merchant before filing a claim. Friendly fraud occurs when a customer files a claim rather than trying to first obtain a refund from the merchant. Well-intentioned customers may accidently commit friendly fraud because they don’t understand the differences in the claims. Customers may need the financial institution’s assistance in obtaining the contact information for the merchant.

Example 2: The customer simply did not authorize the debit.

• This likely means the card has been compromised and should be “hot carded” and a fraud claim processed.

In some cases, the customer does not recognize the merchant name as it is different than the trade name. The financial institution can provide more information on the merchant for the customer, perhaps helping the customer remember they did in fact authorize the debit.

2. Have you ever purchased anything from the merchant in the past? Have you ever given the merchant your card number? Did you forget to cancel a recurring purchase, sign up for a trial, miss the window to return a product, etc.?

Example 1:  The customer has proof of cancellation or meets the requirements to not incur additional charges.

• A dispute should be processed. 

Example 2:  The customer is just now noticing that the charge has been going on every month for the past six months.

• The financial institution is not obligated to provide provisional credit for all the debits. A best practice is to file a claim for no more than three months of debits.

Example 3:  The customer’s transactions are related to a free trial period expiring or introductory promotion.

• In this case, Visa will be implementing new rules in April 2020 for the merchants.  Mastercard has already implemented similar new rules. Cardholders will be provided clearer information, enabling them to identify, recognize and take action on subscription transactions, reducing the number of transactions that result in disputes. The merchant will be required to notify the cardholder at least seven days ahead of the expiration of their trial/promotional period, along with a link or other simple mechanism to cancel the subscription, either online or via SMS/text message. The frontline staff should direct the customer to use one of the available channels to cancel the subscription/service.

Customers who make fraud claims when they find they are auto-renewed for a magazine or some other subscription service can lose all their rights to get their money back. When the merchant comes back with proof that the debit (name, address, etc.) was indeed the customer, then the customer has lost their rights in trying to get back their money. They can’t file another claim for the same transaction. 

If a conversation with the customer can lead to the customer not filing a claim and receiving a refund or merchandise exchange as a result of dealing directly with the merchant, everyone wins – the customer, the merchant and the financial institution. With this ideal result, the financial institution did not have to spend the time or incur the cost of processing the claim and potentially bearing the cost of the claim. 

Making the claim

When a claim is warranted, who at the financial institution does the work? The customer-facing employee has determined a claim—dispute or fraud—is likely appropriate and has the customer complete the required documentation. Frontline staff are not experts in identifying the various nuances and technicalities involved with debit card fraud and dispute claims. It is the job of frontline staff to ask the appropriate questions before processing a claim.

Processing the claim

Once the claim has been accepted, the back-office staff specializing in debit card dispute and fraud claims should own the process from this point forward.

Many financial institutions have established a minimum dollar threshold for claim submission, such as $50. Generally, the dollar amount of the threshold is slightly more than financial institution’s processor charges for filing the chargeback. When below the threshold dollar amount, the customer is made whole and the claim goes no further. 

Permanent credits should be processed by the back-office staff. They may see something in the customer’s claim that causes the financial institution to question the validity of the claim or they simply need to have further communication with the customer before processing a credit to their account.

Additionally, it is important to track the customer credits for claims under the threshold. Ideally at the customer record level, CRM, etc. so that the historical information is available to the frontline staff as well. If the customer becomes a habitual transaction disputer, working the system to routinely get refunds, there may come a time to tell the customer they would be better served banking elsewhere and close their account. 

Industry statistics indicate 40 percent of customers who file one fraudulent chargeback will file another within 90 days.

In conclusion:

• Make sure your frontline staff are well-informed about the differences in debit card disputes and fraud claims and very familiar with the traits of friendly fraud.
• Require the frontline staff to ask key questions of the customer before routinely accepting a debit card dispute claim.
• Track refunds/losses below the threshold and close the abuser’s checking accounts when necessary.

Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to debit card programs to propel growth and improve profitability.