Anatomy of a Fraudster

According to LexisNexis, the volume of successful fraud attacks increased by 28% and 20% during each of the first two years of the COVID-19 pandemic. But fraud does not exist as a singular thing; it takes many forms. These different kinds of fraud are committed by different sorts of fraudsters for different reasons and by different means. In order to combat fraud, it is useful to understand fraud and the techniques and motivations of those who commit fraud. It is best to do so while separating the three main varieties of fraud: true fraud, chargeback fraud, and friendly fraud.

True Fraud Criminal

We define “true fraud” as follows in our article “How to Detect Fraud Before It Becomes a Chargeback”:

“True Fraud is when a credit card is stolen and used to make a purchase. True fraud usually results in the customer reporting the fraud to their bank, the bank closing the account, and the bank issuing a new card to the customer.”

True fraud can involve forms of identity fraud in which a cardholder’s personal information is stolen by a fraudster. It could also involve account takeover, in which the criminal accesses the cardholder’s account itself, either due to stolen credentials or some sort of technological means. There is also synthetic identity fraud, which involves the creation of a synthetic identity to perpetrate the fraud rather than stealing the identity and payment credentials of an actually existing person.

These sorts of chargeback-inducing fraud schemes may be perpetrated by criminals anywhere in the world, either operating individually or as a part of a larger criminal enterprise. And these schemes may be enacted alongside or in conjunction with other forms of fraud such as fronting, muling, and check kiting.

In addition to the tangible consequences of true fraud, both direct and indirect, this form of fraud can be very reputationally damaging for merchants. Indeed, chargebacks were created as a mechanism to remedy this variety of fraud and merchants that allow themselves to be used in these schemes too often can risk being seen as indifferent to or possibly even complicit in fraud.

Adding to the challenges is the frequent difficulty of preventing the most sophisticated true fraud schemes. Criminals constantly fine tune and adapt their fraud schemes as they are, essentially, professional fraudsters. There is even a term for fraud that is particularly difficult to detect and prevent: clean fraud—so named because the perpetrators “get away clean” before the fraud is detected.

Additionally, true fraud cannot be fought and won in representment. While the actions of the criminal are fraudulent, the chargebacks that the cardholders file as a result are legitimate.

Chargeback Fraud Unscrupulous Cardholder

We define “chargeback fraud” as follows in the aforementioned article:

“Chargeback Fraud is when a customer requests a chargeback knowing that they have no valid claim to one. While friendly fraud results from an honest mistake, chargeback fraud is an intentional misuse of consumer protection mechanisms to get something for free. It is often used as a form of digital shoplifting.”

A key difference between true fraud and chargeback fraud is that the chargeback fraudster is using their own payment credentials rather than someone else. And, as a result, the chargeback process itself is the key instrument of fraud, rather than a downstream consequence. As a result, the techniques for committing chargeback fraud closely resemble legitimate chargebacks—claiming merchandise was never received, claiming a purchase was not authorized, etc. Certain payment models—such as subscription billing and buy now, pay later (BNPL)—are particularly susceptible to this sort of fraud.

In theory, since these chargebacks result from intentional fraud on the part of the cardholder, merchants should be able to successfully challenge them in representment. But in practice, that requires being able to do such things as compile the correct compelling evidence and properly present it in a chargeback rebuttal letter.

Friendly Fraud Unwitting Customer

We define “friendly fraud” as follows in the aforementioned article:

Friendly Fraud is when a customer mistakenly disputes a charge for a relatively innocuous reason, such as a family member making a purchase without the customer realizing, the customer genuinely forgetting that they had made a purchase, or some mistake relating to the customer not understanding something such as a return policy. The key distinction is that the customer is not knowingly, intentionally committing fraud.

Family fraud can arise out of a number of different circumstances. For example, a child could inadvertently make an in-app purchase while using their parent’s phone—something known as “family fraud.” Plenty of friendly fraud results from cardholder confusion, as well. Consumers may be confused about billing or shipping policies. They may also file friendly fraud chargebacks due to unrecognizable descriptors or merchant identifiers on billing statements. Much of family fraud can be prevented by having clear policies, regularly communicating with cardholders, and practicing good customer service. Often preventing friendly fraud may involve giving good faith refunds, but a refund is always preferable to a chargeback.

Conclusion

Fraud takes many forms and chargebacks come from a wide variety of sources. As a result, responding to and preventing fraud-derived chargebacks requires strategies tailored to the different kinds of fraud. Some anti-fraud tools may be oriented toward preventing true fraud while others are better suited to clearing up the sort of confusion that may lead to friendly fraud. Similarly, different fraud-prevention strategies are better suited to different kinds of fraud. Fraud prevention is a complex, multi-faceted endeavor.