In this first of two Q&A sit downs with Jordan McKee, a Senior Analyst of Mobile Payments with 451 Research, we'll examine the ins-and-outs of a relatively new challenge for merchants coined “friendly fraud”.

Question #1: There have been random reports of retailers experiencing “friendly fraud” perpetrated by legitimate credit card holders. What specifically is this and have you heard any anecdotes?

Answer: On the consumer front, card-present friendly fraud occurs when a cardholder intentionally disputes a legitimate transaction at a non-EMV-compliant merchant, often resulting in a full reimbursement for the cardholder and a chargeback for the merchant. There has also been talk of a similar phenomenon occurring at the issuer level. In this scenario, unscrupulous issuers essentially game EMV protocols, mischaracterizing non-EMV-related chargebacks as the result of a merchant's absence of EMV terminals. We’ve spoken to large retailers that have are experiencing an influx of chargebacks with EMV reason codes, even for non-EMV cards.

Question #2: How big is this problem?

Answer: The real losers are noncompliant merchants, but the implications could stretch across the ecosystem. There is a clear risk that friendly fraud will lead some of these impacted parties – particularly small businesses – to wash their hands of payment card acceptance altogether and revert to tried and trusted means of tender, such as cash. This situation could become precarious quickly as issuance of EMV cards continues to increase against the backdrop of limited small-merchant EMV adoption. The onus is on all value chain participants to support the common good by implementing processes to identify and counter instances of friendly fraud wherever possible.

Question #3: What can a non-EMV compliant retailer do to prevent this?

Answer: The risks associated with non-adoption of EMV terminals are increasing precipitously. Merchants who are not EMV compliant have a target on their backs and will continue to be the prey of fraudsters and faulty chargeback protocols. In addition, the risk of negative consumer perception is a threat that will only continue to grow. As more merchants adopt, those who don’t will inevitably be perceived by their customers as “insecure.” Time is of the essence for merchants to implement EMV.

About Jordan McKee

Jordan McKee is a senior analyst on the 451 Mobility Research team, which was established in July 2014 with the integration of Yankee Group. His research examines the impact of mobility on the constituent components of the payments value chain. His key research areas include mobile point of sale (mPoS), mobile payment platforms, mobile customer engagement, emerging payment technologies (e.g., BLE, NFC, EMV) and virtual currencies. 

​​Q&A with 451 Research's Jordan McKee Part One: What is Friendly Fraud?

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