minimizing fraud losses With fraud losses topping $712 billion in 2020, banks and fintech program managers are struggling with rising transaction dispute volume. Learn more about emerging threats and how to protect your business.
For every $1 of fraud, financial institutions (or prepaid program managers or digital banking partners) pay $3.64 to manage the fallout. Meanwhile, fraudsters (including “friendly” ones from your own customer base) are trying new scams every day, and the pandemic has only exacerbated the problem.
Last month, I had the opportunity to speak with members of the Innovation Payments Association Financial Crimes Task Force. As I told them, there are several strategies to protect your business and improve efficiencies while delivering a positive customer experience. But first, we should talk about the context. The numbers are significant.
$712.4B
Fraud losses in 2020
47%
U.S. consumers who reported fraud in the past two years
$7.9B
U.S. consumers who reported fraud in the past two years
$50B
U.S. consumers who reported fraud in the past two years
615M
U.S. consumers who reported fraud in the past two years
700%
U.S. consumers who reported fraud in the past two years
Disputes and chargebacks on the rise
We support dozens of different companies in the space and handle hundreds of thousands of disputes per month. We’ve seen these increases firsthand across a wide swath of customers. In addition to true criminal fraud, there’s no question that the prevalence of friendly fraud also is increasing.
With record-breaking online shopping and other card-not-present transactions, we’re bracing for record numbers of chargebacks. We’ve already started to see some of that, particularly when stimulus checks have hit accounts. But the worst of the volume may be yet to come, with chargebacks expected to hit 615 million this year.
We’re going against some headwinds to be sure. That’s why it’s never been more important to have a scalable, compliant process for managing disputes and chargebacks and be able to adapt to emerging threats.
Looking at trends around the increase of specific dispute types has influenced our approach to case management. In addition to the general theme of more card-not-present transactions being disputed, the three largest categories of disputes we’re seeing are related to account takeover (ATO), ATM withdrawals and P2P transactions.
With account takeover, damage is swift and severe—40% of fraudulent activity associated with account takeovers happens within 24 hours, and losses can be significant for customers and potentially for you. This is one area in which prepaid and debit could have the upper hand on credit in terms of detection because cardholders are typically checking their balances more often.
Of course, the frightening aspect for customers using these products is that it could potentially drain their entire balances. That said, we suspect that some of the alleged ATO activity is first-party fraud, but it’s difficult to prove.
Another ATO vector has been for fraudsters to take over merchant accounts/devices and then using them to fraudulently credit and debit consumer accounts. The fraudsters dispute the transactions as duplicates or incorrect amounts, then withdraw the provisional credit funds nearly instantly. The consumer accounts appear to either be taken over by the fraudsters or, in some instances, the consumer owner may be willingly participating in the fraud.
Despite all the news of cash payments in decline, we’ve seen a marked increase in ATM withdrawal claims for unauthorized transactions as well as ATM non-dispense claims.
One of the reasons we believe non-dispense claims have become so popular is that a cardholder can get the provisional credit and still use their card—unlike when you claim your card has been compromised, and you have to cancel it and wait for a new one.
We’ve seen our clients cardholders out on online message boards offering tips on how to make some quick cash. Their knowledge of the dispute process and associated regulatory requirements is pretty detailed.
Person-to-person (P2P) transfers, which are gaining in popularity with consumers, have also seen a dramatic increase fraud—as much as 700% over the last year, according to some reports.
We’re not seeing quite that dramatic of a shift in any portfolio we support, but we’ve seen increases of as much as 400%.
Mitigating dispute and fraud losses
Now the big question: What can we do about all this?
From where we sit in the process, we collaborate closely with our clients to make recommendations, but it’s ultimately up to the client and their compliance team and/or the issuing bank’s compliance team to sign off on any significant process changes. And while I can’t speak to client specifics here, I can talk about a few general best practices to keep in mind.
1. Reprioritize your queue
Your instinct might be to work the oldest cases first, but that’s not always the best strategy. We found that prioritizing the queue based on the underlying risk of the transaction, the potential for funds recovery or the opportunity to complete an investigation before provisional credit is due—while keeping in mind the regulatory timeframes—can actually pay pretty big dividends.
For example, if you’re seeing the same spike in ATM non-dispense claims I mentioned, you might want to change your process so that your analysts are submitting a chargeback the same day the disputes come in. In many cases, you’ll have a response before you ever need to issue a provisional credit. We also have worked out arrangements with some ATM operators to avoid the chargeback process entirely. We contact them immediately, and they provide us with the evidence needed to resolve the case.
The other thing we’ve done as we’ve increased staff for fraud investigation and dispute handling is to make sure newly trained agents are handling less complex or smaller dollar cases than more experienced staff. You can do a lot in the training process, but someone who’s been handling cases for a few years is still going to be better equipped to deal with more difficult cases.
2. Reexamine your write-off thresholds
Review your dispute and chargeback trends and determine whether your write-off threshold is where it should be. Most programs have some sort of de minimis transaction where anything below that amount you’d write off rather than pay to investigate. However, there are a couple of pitfalls to avoid. We’ve worked with a number of clients on the consulting side who kind of arbitrarily picked a number for their write-off threshold without really understanding how much it costs to investigate a claim.
If you’re paying $15 investigating a claim, you don’t want to go through that process for a $5 claim. But a lot of our clients were writing off $50 claims when it actually costs them $12 or $15 dollars to do an investigation and that’s not a good trade-off either. Your de minimis is a very personalized and risk-based decision, but you might need to change it depending on the volume of claims you’re dealing with as well.
Another pitfall here is if you pick a number that’s too high, it’s likely ripe for abuse. There’s no shortage of discussion in online forums, saying for this issuer or that issuer, you can receive funds if you claim less than X amount.
I also recommend putting in controls to track whether cardholders have a certain number of these below-threshold disputes within a given period of time. If that’s happening, then you might want to apply more scrutiny rather than continuing to write off their disputes.
“Another pitfall is if you pick a write-off threshold that’s too high, it’s likely ripe for abuse. There’s no shortage of discussion in online forums, saying for this issuer or that issuer, you can receive funds if you claim less than X amount.”
3. Resolve as many claims as possible before provisional credit is due
Of course, this is on everyone’s wish list, but if you have the staff to do it, you could stem some of the losses from fraud—friendly or otherwise.
However, fast is only as good as it is accurate. So, it is not an easy thing to do. And, with the influx of card-not-present claims, there are more cases that you have to wait for a merchant response to the chargeback.
One of the other things we’ve done to resolve claims faster and without the expense or wait of filing chargebacks is to do outbound calls to merchants. There are some merchants that will never give you information, but some merchants and some categories of merchants can and are willing to be very helpful in gathering investigation and decisioning data. Car rental places, hotels, medical facilities, banks/ATM owners and bigger online/mail order/telephone order merchants like Amazon. Maintaining a list of those merchants for your analysts saves a lot of time, and we also work with merchants indirectly through the chargeback alternative networks to speed up resolution for clients who are members.
4. Establish a dedicated intake team
One of the things we do that could help with speed and accuracy needed for No. 3 is to set up a dedicated intake team. While your volume might not warrant this move, or you might believe that you want any customer service agent to be able to handle any customer need, we’ve had a lot of success with this model.
Disputes and all the regulatory requirements and network rules—to say nothing of the fraud trends we’ve talked about—are a lot to keep track of. I know some organizations are turning to AI and machine learning technologies to help automate decisioning. While this approach may have merit down the line, I think we have a ways to go yet before all the complexities can be accounted for—and the human error that can still be involved.
For most of our client, we have one group of agents who do nothing but phone intake for dispute and error resolution claims. They know Reg E (or Reg Z for our credit clients), and they know the probing questions to ask the customer to ensure that the investigations team can hit the ground running without having to spend precious time and resources reaching back out to the cardholder for more data.
A shared queue for 24/7 or weekend hours might make sense, but for daily business hours, I would recommend a dedicated dispute intake team and a rigorous QA audit process for both intake and investigations. (We’re achieving compliance scores in the high 90s, which demands vigilance.)
In 2020, we created a Leadership Essentials program to ensure that anyone hired or promoted to a Team Lead position had gone through this special training, and we continue to monitor leaders’ progress. So, in addition to coaching our agents and investigators, we also coach the coaches to make sure coaching is effective at driving quality and compliance.
My final tip is to share information. The fraudsters certainly are. Learning from one another is one of our best avenues to mitigate and perhaps even prevent fraud.
We work closely with our clients to alert them to fraud trends, merchant or geographic hotspots we’re seeing as well as repeat disputers on a weekly basis (or more often as the threats warrant). And they alert us if they’re seeing emerging fraud trends we need to be on the lookout for.
Whether you outsource any of this work, or it’s all in-house, make sure the fraud team and the dispute team are talking regularly. That simple act can save countless hours and dollars that could be better spent elsewhere.
Together, we’ve been able to help identify and shut down activity around suspicious transactions.
And more broadly as an industry, I think it’s important to share information to thwart attacks by working with groups like the IPA. Everyone is competitive on a certain level, but I think we could all agree that lowering fraud losses is best for everyone.
Access the full Webinar, including some innovative technology approaches to the fraud problem.
Corey Besaw has spent his career providing and consulting on dispute and chargeback management, KYC and fraud investigation, and customer service for banks and fintech companies. He is a co-founder of Ubiquity, where he serves as president of the Banking Operations division.
Sources: See full presentation PDF.
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