May 16, 2020

Verifi on digital goods driving a new form of fraud

Neil Smith
5 min
Neil Smith is the Head of Issuer Sales & Partnerships, EMEA and APAC at Verifi. Here he shares with business chief the rise of fraud of digital good...

Neil Smith is the Head of Issuer Sales & Partnerships, EMEA and APAC at Verifi. Here he shares with business chief the rise of fraud of digital goods.


“You wouldn’t steal a car,” ran the advert for an anti-piracy campaign comparing the crime with the unauthorised duplication and distribution of films and music.

Fast forward 15 years and it’s no longer just movies and music. “Digital goods” is now an all-encompassing term for anything intangible that exists in digital form – from online games and mobile applications to subscription services and electronic tickets.

Often, those downloading content or buying digital goods without authorisation are unaware they may be committing a criminal offence. In light of this challenge, the payments industry has added new terms to the lexicon on financial crime: “family fraud” and “friendly fraud”.

The first of these – family fraud – involves someone, often a child, making unauthorised payments on a parent’s account – typically an in-app purchase, but sometimes a physical item ordered from an online retailer. Friendly fraud applies to when the consumer makes a purchase online for a product or service with their credit card only to dispute the charge later, because they either don’t recognise the payment or forgot ever making the payment in the first place.

In a recent Javelin Strategy & Research report, sponsored by Verifi (the “Javelin Strategy & Research”), which focuses on the near- and long-term effects from chargebacks, it was found that nearly half of the chargebacks experienced by in-app digital goods merchants are thought to be the result of friendly fraud. The issue is especially challenging for merchants who offer purchases only in digital (or remote) channels, where friendly fraud is nearly 50% more prevalent than for physical-channels merchants.

The challenge when dealing with digital goods comes from the multiple choices of payment methods now available to consumers buying online. With so many payment options available, it can be easy for consumers to forget making a purchase. Multiple payment methods can add to consumer confusion, which in turn can lead to increased chargebacks.

In addition, not all payment providers have a well-defined process for dealing with chargebacks. A straw poll of the top 10 payment providers (according to Finance Online) shows that 40% don’t mention chargebacks anywhere in their FAQs or terms & conditions. From those providers that do, every process is different – with the majority opting to manage disputes internally between a consumer and merchant.

The problem is compounded by the nature of payments in digital goods. What makes digital goods fraud different from other card-not-present (CNP) fraud is that, in the case of the former, it is more difficult to discover the identity of the consumer. And because purchases are easier and faster to make, consumers are becoming more aware of fraud vulnerabilities in purchasing. This can lead to an increase in disputed transactions, often resulting in costly chargebacks.

Impact on merchants

When you combine the complexity of managing chargebacks specific to digital goods with the method of payment, merchants struggle to find the appropriate documentation to successfully represent the transaction. It has got to the point that merchants often have to rely on tenuous identifiers, such as email and IP addresses, to establish that the consumer in the disputed transaction is the one linked to the card account.

We found that 24%[1] of merchants selling digital goods indicated that the inability to obtain the necessary documentation was the most common reason for their representation attempts failing, compared with just 16%[2] for merchants who sell only physical goods.

Added to this is the reputational damage that occurs whenever a transaction goes wrong, resulting in merchants being overwhelmingly blamed for problem transactions – with 56%[3] of consumers saying that it is the merchant’s responsibility in cases of fraud, and 66%[4] in non-fraud cases. Compare this to the next highest group affected, the payment card issuer: these are blamed in only 25%[5] of fraud and 15%[6] of non-fraud disputes.

Impact on issuers

Up to 72%[7] of digital goods merchants believe that consumers bypass them and directly dispute the transaction with their card issuer, compared to 64%[8] of merchants who only sell physical goods.

This puts pressure on issuers and their capacity to cope with the volume of chargebacks, especially as related to peak retail periods such as year-end holidays, Black Friday, etc.

The easy solution for issuers is to accept the chargeback and offer a provisional credit to the consumer. However, there are two key factors in an issuer’s unwillingness to go forward with a chargeback. First is the pressure to remain “top of the mobile wallet”. With the ease at which consumers make purchases (thanks to one-factor authentication and autofill), there is an expectation that payment must be instantaneous and without complication. Anything but a seamless user experience will encourage a consumer to change their cache.

Secondly, regulatory pressure provides issuers with strong incentives to err on the side of caution – in short, favouring the consumer. Worryingly, in our research we found that more than one-quarter[9] of issuers report that they do not track the number of transactions disputed by each account holder, leaving them vulnerable to friendly fraud perpetrated by individuals seeking to game the system. Among issuers who do not track serial disputers, the most prevalent rationale is that they do not wish to inconvenience consumers with the follow-up tracking that the process entails; in our research – 44%[10] of issuers who do not track consumer chargeback frequency cite this as their reason for not doing so.

The collaboration solution

While a complete solution to family fraud and friendly fraud may seem far over the horizon, there is much that merchants and issuers can do to bring down the rate of chargebacks. New initiatives by Visa and Mastercard to enjoin merchants and issuers in collaborative effort to reduce disputes and mitigate fraud involve sharing of transaction data at the point of consumer enquiry. Third-party solutions already on the market further involve consumers by delivering to them merchant and transaction details, as provided by issuer digital channels. By involving all parties in payments – issuers, merchants, and consumers – the first, bold step toward reducing fraud and chargebacks can be made to benefit all involved, especially in providing an improved experience for consumers.

[1-10 “The Chargeback Triangle” – Javelin Strategy & Research, 2018.]


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Jun 17, 2021

Zafin: Banking is now in the era of the tech ecosystem

3 min
FinTech Magazine holds a Q&A session with John Smith, EVP Ecosystem at Zafin, on the evolution of banking and its future as an aspect of tech ecosystems

The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?

John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.

Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:  

Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?

It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started. 

While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk. 

Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand. 

I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.  

When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic. 

Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?

I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.

Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.  

The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC. 

I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives. 

Q. Are there any other bank tech trends you'd like to discuss? 

Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement. 

Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.

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