Friendly Fraud Costs Businesses Billions Of Dollars: Study

Many people probably think evil data hackers cause most online fraud.  

It’s not true — first-party fraud, or friendly fraud, is perpetrated by consumers themselves. 

Fraudulent abuse of coupons and promotions is now so widespread that retailers budget for prospective losses, according to Digital Fraud Tracker, a study from PYMNTS and Datadvisor. 

These budgets must be high: This form of fraud costs merchants $89 billion per year, according to a PYMNTS survey.  

Not that all abuse is fraudulent by intent. A recent study found that 52% of shoppers have tried to use an expired coupon, 49% have sought to redeem a coupon for an ineligible product and 63% have attempted to apply multiple promotions that cannot be combined.  

Tailored communications with customers can help reduce fraud (or, presumably, mistakes). Many brands will send email “blasts” to a multitude of customers at one time, with generic codes, says Jake Doering, founder and creative director of ujji, a provider of plant-based wellness drinks.

Inevitably, at least one recipient will try to take advantage of a coupon by using it more than once or ‘stacking’ it with other coupons to get multiple discounts, Doering says. 

Doering’s company offers a 30-day guarantee for its products, and enjoys a refund rate of less than 1%.

“There’s no vetting process or verification, as they just email us and we immediately refund everything, so for us, it’s about trusting that the product is amazing,” he said. 

The study combines several terms, including policy abuse, first-party fraud and friendly fraud under the rubric of policy abuse.

Traditional tools “are not great at detecting policy abuse because they are designed to look for instances where identities, credentials and payment methods are compromised, as is not the case with these issues,” writes Tinglian Xie, CEO of Dataadvisor.  

This is especially true in the financial services area. 

Transaction level fraud detection is “ineffective at mitigating the dam- age caused by the customer of a financial company abusing sign-up bonuses by opening hundreds of accounts using different email addresses. When seen in isolation, each of these account openings could seem valid, but when analyzed in bulk, a different reality would appear.” 



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