The Paypers recently reported on a new ECB study detailing a downward trend in fraud. However, the 2023 Chargeback Field Report, which The Paypers also analyzed, indicates an increase in chargebacks despite the overall decrease in fraud.

This conflicting data begs the question: is fraud truly in decline or not?

Card Fraud Reduction in Europe

The European Central Bank has released a report on card fraud that underscores a notable drop in fraudulent card activities across Europe.

Data from 20 card payment scheme operators included in the report spotlights some critical card fraud trends. In 2021, fraudulent incidents showed a downward progression, reaching the lowest level since the inception of data tracking. This accounted for 0.028% of the total value of card payments made using SEPA-issued cards, amounting to €1.53 billion out of a total of €5.40 trillion.

In 2019, though, card fraud constituted €1.87 billion out of a total value of €5.16 trillion. The highest recorded card fraud rate was 0.048% of transactions back in 2008. However, there’s an important distinction to be made between card-not-present fraud and card-present fraud.

Continued Dominance of Card-Not-Present Fraud

In 2021, card-not-present fraud represented about 84% of the total card fraud value. Still, a 12% decrease was seen from 2020, attributable to the implementation of robust customer verification under the revised EU Payment Services Directive (PSD2). Card-present fraud, on the other hand, dropped by 6% in 2021 compared to 2020, largely due to global standards that helped reduce magnetic stripe counterfeit fraud opportunities.

The ECB report also highlights that most card fraud in 2020 and 2021 involved cross-border transactions. Specifically, these transactions constituted just 11% of total transaction value, but were responsible for a sizable 63% of total card fraud value in 2021.

This suggests that total credit card fraud instances are declining in Europe. Nonetheless, card-not-present fraud continues to pose significant challenges for international merchants and cross-border payment providers.

A Stalemate in the US

According to a recent study from Security.org, Europe’s situation differs quite significantly from that of the US. This report reveals:

• 65% of US credit and credit card users have experienced fraud at some point, up from 58% the previous year and equating to about 151 million Americans.
• A notable rise in repeat victimization among Americans: In 2022, 44% of credit card users reported experiencing two or more fraudulent transactions, up from 35% in 2021.
• From 2021 onwards, the average fraudulent charge has increased by about 27%, reaching $79 this year. This corresponds to a staggering $12 billion in total attempted fraudulent charges.
• Those who store their credit card information in their web browsers and use the same card for autopay and everyday spending are more likely to be victims.
• A small, yet significant proportion of people (12%) had fraudulent recurring charges from the same merchant over several months.

This suggests that, while Europe may be witnessing fewer credit card fraud instances, fraud in the US is steadily climbing. Other recent stats indicate a higher rate of card-not-present fraud in the US, accounting for 36.8% of all global fraud.

Illegitimate Chargebacks Show No Signs of Abating

The 2023 Chargeback Field Report provides an overview of first-party dispute misuse, and of chargeback management in the CNP space for financial institutions and retailers. Some intriguing findings from the report include:

• Almost three-quarters of survey respondents reported an increase in friendly fraud occurrences.
• The average merchant saw a 19% average increase in first-party misuse.
• Merchants reported that 44% of chargebacks resulted from friendly fraud.
• 72% of polled consumers indicated that lodging a chargeback was more convenient than addressing issues with the retailer directly.

These observations suggest that chargebacks are emerging as a more significant concern than credit card fraud in the US. Post-transaction threats, which standard fraud tools cannot detect, are more expensive and challenging to counter.

The report indicated that only 32% of surveyed firms and merchants currently use an alert system to resolve disputes and prevent chargebacks. When these tools were used, respondents saw an average 27% reduction in chargebacks. Moreover, firms that leverage software, services, and solutions via a platform provider reported a net recovery rate 55% higher than merchants managing the process in-house.

This all suggests that chargebacks resulting from friendly fraud are becoming a more significant issue. However, it also posits that the situation can be improved when the right steps are taken.

How Should the Industry Respond?

Despite the modest reduction in credit card fraud in Europe, substantial challenges persist. Furthermore, these figures don’t directly address the issue of first-party abuse in the chargeback process.

Hazards like friendly fraud are on the rise, regardless of geographical boundaries. Merchants and the wider payment industry must treat this issue with gravity. Otherwise, the situation will inevitably deteriorate further.

Given the data presented above, banks and financial institutions need to adopt a multipronged approach:

#1. Strengthen Fraud Prevention Measures

Even though the data shows a decrease in card fraud, particularly in Europe, it’s important to maintain and strengthen fraud prevention measures. This can include implementing advanced technologies like artificial intelligence (AI) and machine learning (ML) to detect unusual transaction patterns.

#2. Enhance Customer Authentication

Data indicates that card-not-present fraud remains a significant issue. banks can enhance customer authentication methods to address this. Implementing two-factor or multi-factor authentication (such as OTPs, biometrics, etc.) can add extra security layers to online transactions, making it more difficult for fraudsters.

#3. Educate Customers

A large percentage of fraud occurs due to customers’ negligence, as indicated by the data regarding storing card details in browsers and using the same card for autopay and everyday expenses. Banks should run awareness campaigns to educate customers about safe online transaction practices.

#4. Improve Chargeback Management

The rise in chargebacks, especially those resulting from friendly fraud, necessitates improved chargeback management processes. Banks can consider using alert systems or services to help prevent illegitimate chargebacks.

#5. Partner with External Providers

The data shows that companies that leverage external platforms have a higher net recovery rate than those managing the process internally. Banks should consider partnering with third-party service providers that specialize in fraud prevention and chargeback management.

#6. Review Cross-Border Transaction Policies

With cross-border transactions being a significant contributor to card fraud, banks need to review their policies and enhance security measures for such transactions. This might include stricter authentication or closer monitoring of these transactions.

#7. Collaborate With Merchants

Banks should work more closely with merchants to establish protocols and share information about suspicious activities. This collaborative approach could help both parties mitigate fraud risks.

#8. Invest in Research & Development

Lastly, with fraud patterns continuously evolving, it’s crucial for banks to invest in research and development. Keeping abreast of new fraud types and developing cutting-edge solutions to combat them should be a top priority.