As part of our “Best of Subscription Show” members-only series, we’ll look back at some of our most popular speakers and sessions and share key takeaways that show why this information remains relevant and how you can use it to grow your subscription business or inform your decision making. In this article, Chris Marchand, VP of Business Development at Verifi, and Sharon Gross, Director of Client Success at Paul Larsen Consulting, share insight on the changing nature of fraud and how subscription businesses can prevent it without creating a challenging experience for their customers.

There’s no way around it: running a subcription business means dealing with subscriber disputes, chargebacks, and fraud. With technology seemingly speeding up its rate of evolution, the characteristics of disputes are constantly changing. What disputes look like in one country may differ wildly in another. Reason codes don’t always reflect the true nature of a dispute, despite how far they’ve come in adding clarity to the process.

Nowadays, it’s up to merchants to dig into the subscriber dispute and figure out what’s really going on. And just as the disputes are changing rapidly, so is the nature of fraud. Fraudsters are constantly evolving their tactics to take advantage of loopholes in new technology. Just as businesses address and fix an area vulnerable to fraud, a new one will arise.

What’s going on with fraud?

Card-Not-Present (CNP) transactions are growing, thanks in part to the pandemic. Between March 2020 and March 2021, CNP transactions grew by 39%. Why such an increase? CNP transactions are part of what creates a frictionless checkout experience for customers. And with 92% of customers expecting fast, frictionless checkout experiences, it’s no wonder more businesses are accepting CNP transactions.

The positive side of this is that it increases sales; the negative side of this is that it increases subscriber disputes and fraud. According to Chris Marchand, Vice President of Business Development at Verifi, 75% of merchants saw an increase in fraud attacks between March 2020 and March 2021. This, in turn, triggered an increase in fraud prevention spending five-fold.

“What this tells me is that merchants take fraud very seriously. There’s a lot of fraud that’s happening…so there’s a huge investment of stock in fraud prevention on the front end,” says Marchand. “But then we have to get back to that 92%. There’s the balance point. How are you balancing the expectations of your customer and spending this much money on fraud prevention?”

Types of fraud

When merchants move into a new environment, it’s important they focus on keeping the customer experience frictionless. But often this means they’re exposed in some areas to fraud and disputes. There are different types of fraud that merchants experience:

• Friendly fraud
• Card testing
• Phishing/Pharming/Whaling
• Identity theft
• Coupon/Discount/Refund abuse
• Loyalty fraud
• Synthetic Fraud

Though merchants spent five times more on fraud prevention in 2020, there were double the amount of fraud attempts in a six-month period in the same year, totaling 1.1 billion attempts. Contributing to the issue of fraud attempts are new payment methods becoming more mainstream, digital wallets, digital channels, and consumer expectations around having a frictionless checkout.

Synthetic fraud is where a fraudster uses a valid social security number and then makes up all of the PII details. It’s incredibly difficult to stop. According to Lexus Nexus, 85% of synthetic fraud transactions were not flagged by a front-end fraud solution. Synthetic fraud is becoming more prevalent, and it’s something merchants need to watch for.

“As we start thinking of the types of fraud, friendly fraud is going to fit here as a huge part of it,” says Marchand.

“Friendly fraud,” which goes by a variety of names, and “card testing” are two types of fraud that actually decreased in 2020. This indicates the amount of spend that was conversely increased on fraud prevention. However, what increased was identity theft, often in the form of phishing, pharming or whaling. It became the most common fraud globally in 2020. Often this type of fraud was carried out through email, with links enticing readers to click.

Merchants identify friendly fraud in different ways. The term “first-party misuse” — when a consumer has the intent to defraud a merchant and understands how the system might work and so they take advantage of it — is becoming more prevalent.

“That’s where it becomes very critical for merchants to work together so the information exists at the point where this friendly fraud is taking place,” says Marchand.

VISA has seen a rise in first-party misuse from 2019 to 2021.

“Close to 6 million disputes per month in North America in 2020 were friendly fraud,” says Marchand.

A 21% rise in CNP transactions brings along with it more disputes. A dispute from a CNP transaction is 60% more likely to end up in a dispute than a card-present transaction. Because of that, it’s great that the merchants are seeing an increase in front-end volume (more sales), but now they have the cost of the disputes. And a decision has to be made around accepting or fighting the dispute. No matter the choice, there’s a cost associated with it.

Technologies exist that allow merchants to have wider access to channels that facilitate great fraud prevention and interaction with issuing banks. The hope is that conversations like these, between merchants and issuing banks, will help reduce friendly fraud in the future.

For businesses to address this issue, it’s important they look at the technology that will connect them with where the dispute gets created. From there, businesses can create a strategy on how to solve the issue.

“I think you need both; I think you need that front-end fraud solution, and I think you need solutions that will allow you to participate in conversations that you have historically not been a part of,” Marchand says.

Balancing friction and frictionless

From March 2020 to March 2021, CNP transactions grew by 22%. This indicates surplus of disputes in the ecosystem that shouldn’t be there. The goal of companies like VISA and Verifi is to reduce the overall number of disputes that are in the ecosystem. With some of the technology and automation present in transaction processes today, the other goal is to reduce the time to resolution of the disputes.

“Prior to VISA Claims Resolution (VCR), the average dispute resolution time was 55 days. VCR goes in around April of 2018 and that drops the resolution time to about 24 days,” says Marchand.

But 24 days is still a large amount of time from when the customer makes a purchase, charges back, and then moves on. The aim of dispute and purchasing technologies is to get the resolution time to less than 10 days.

But that’s not to say the fraud technologies that are out there aren’t working to a great degree. And it’s thanks to measures like two-factor authentication and authentication codes (those codes sent via text) that are preventing a lot of fraud.

“I think a lot of people are okay with a little bit of friction [when logging in],” says Sharon Gross, Director of Client Success at Paul Larsen Consulting. “You definitely want to avoid friction, but there are certain things that, because everybody is more comfortable buying things online now, is just how the world works nowadays. It just becomes part of your life.”

Marchand also points out that when victims of fraud (like identity theft) are much more open to the little bits of friction that appear in transaction processes. It’s much easier than dealing with undoing the aftereffects of fraud.

How do merchants find the right balance of fraud protection and a frictionless payment experience? The goal of any subscription business is to increase customer retention and reduce churn. But Marchand urges subscription businesses to consider how they can bring in the right type of customer: one that’s not a fraudster.

“I think that’s where that fraud solution on the front end is going to help you out. And maybe that differs by region. Maybe there’s a region that’s a little bit riskier than others as you look at what you’re putting into place and how that affects your churn on the backend,” says Marchand.

This is a constant battle for companies, to achieve that balance. And the balance will have to evolve as times change, technology evolves, and fraudsters find new techniques.

Ways to decrease fraud

“When we think about subscriptions, it has become so commonplace, so well-known that most consumers aren’t afraid to jump in even if those subscriptions fall into [a] risky category,” says Marchand.

It’s harder for fraudsters to defraud companies that sell physical goods because there’s usually a tracking process through mail carriers. Merchants have gotten a lot better about not allowing the order to be placed and then allowing the address to be changed afterward, for example.

With digital goods, there aren’t that many steps, and more often than not, digital goods are at a lower price point than physical goods. Thus, digital goods are easier to defraud.

One way merchants can focus on decreasing fraud is to create a positive post-purchase experience. Though the above statistics make everything seem doom and gloom, there are ways merchants can take positive action.

“There are a lot of opportunities for you to gather information on those interactions between you and your customer,” says Marchand. “And that information you gather that can be used as compelling evidence [in fraud cases.]”

A post-purchase experience can have a few different benefits to the organization, engagement and reduced churn being chief among them. But Marchand encourages subscription business owners to consider how the information gathered from that interaction prepares the company for a post-purchase dispute. Creating a paper trail makes it easier to recover funds if a dispute occurs. Seventy-six percent of the time merchants are left out of that interaction with the consumers when there’s an issue.

“To say it another way, 76% of the time the customer is going to the issuing bank and removing [the business] from that conversation. That’s why I go back to the idea of all of the different technologies that are out there that are helping you stay in touch, stay in that conversation, even when the customer doesn’t come to you,” says Marchand.

Sixty-three percent of the time when the customer experiences fraud with a merchant, they don’t return. That’s an important statistic for subscription business owners who focus on a much longer lifetime value for consumers than other businesses.

As subscription businesses formulate their post-purchase experience with customers, they must consider what type of information they want to gather and what they need to do to keep them as a lifetime customer.

“It’s trying to change that paradigm…to get that consumer to come back. And a lot of merchants, especially subscription merchants, have done such a great job with that. But I think that’s why you see some of that behavior outside of someone just wanting to defraud you,” says Marchand.

To reduce disputes, subscription businesses need to implement a post-purchase solution to address potential issues. A safety net like this on the backend will allow businesses to continue to drive new sales with reduced vulnerability.

Fraud prevention and fraudsters are constantly evolving, which means subscription businesses have to evolve too. Keeping track of the types of fraud they’re vulnerable to, implementing measures to prevent fraud, and striking a balance between safety and a frictionless customer experience will allow businesses to flourish in the market today.