How Small Merchants Can Fortify Their Defenses Against First-Party Fraud

Small merchants often find the battle against fraudsters challenging. The struggle gets even harder when you deal with first-party fraud. You end up in a fix when your customers use their payment credentials for a dishonest act that hurts your bottom line. In such events, customers receive goods from you but never pay for them. Whatever the reason they do it for, your business suffers.

According to the FICO Global Fraud Report 2023, nearly 1 in 4 people consider first-party fraud acceptable. This compounds the issue for small merchants struggling to balance customer relationships and profitability. Missing out on robust security measures can make your organization an attractive target for fraudsters.

We will share a few practical strategies for small merchants to safeguard their businesses against first-party fraud.

Recognize the Risk

The worst mistake you can make is to undermine the risk of first-party fraud for your business. A consumer may commit it intentionally, defrauding a merchant for personal and financial gain. 

The Merchant Risk Council reported that first-party misuse affected more than one-third of merchants in 2023. The sheer number indicates the gravity of the risk. Here are a few common types of first-party fraud merchants should be aware of:

  • Chargeback fraud 
  • Buyers remorse
  • Family fraud
  • Return fraud
  • Coupon/discount abuse
  • Refund abuse
  • Unrecognized transactions/transaction confusion

Ethoca notes that first-party fraud often hides in plain sight since your customers rather than fraudsters are the perpetrators. You must take it seriously and implement appropriate measures to prevent them and protect your revenues.  

Establish Clear Communication

Clear communication between merchants and customers is vital to keep chargeback issues at bay. As a rule, you should establish clear policies and procedures. Ensure that your buyers get relevant and adequate information about your refund processes and terms of service on your website and during the checkout process.

Additionally, customers need to understand the steps to resolve issues or disputes they may encounter during their purchase journey. It reduces the probability of first-party fraud and helps resolve conflicts if they arise. Further, clear communication of policies fosters trust, ensuring customer satisfaction, long-term retention, and strong relationships with your business. 

Provide Excellent Customer Service

Besides ensuring seamless communication with customers, merchants should go the extra mile with customer service. Exceptional customer service with responsive and personalized support enables merchants to address concerns promptly. They can also provide satisfactory resolutions to any problems and foster a sense of trust, discouraging customers from resorting to friendly fraud.

Also, remember that refunds cost less than chargebacks to a business. Consider a lenient refund policy for your customers as a part of your offerings. Also, give your customer service representatives enough leeway to initiate refunds outside the original policies. You may end up with loyal customers instead of people defrauding your business for personal interests. 

Educate Staff and Customers

Statistics show that friendly fraud affected 34% of global e-commerce merchants in 2022. Identity theft (33%), card testing (33%), and coupon, discount, or refund abuse (30%) came after this form of fraud. 

However, first-party fraud is easy to deal with because many people do not commit it with malicious intentions. At times, they become victims when someone hacks their account or uses their card to buy things without their knowledge. 

Training staff and educating customers can significantly reduce the chances of fraud. Employees should be aware of red flags such as inconsistent customer information and unusual purchasing patterns. Similarly, customers should know about best practices to secure their accounts and reporting procedures for suspicious activities. A culture of awareness can create an additional line of defense against fraud.

Leverage a Payments Intelligence Network

Real-time information sharing enables business owners to reduce transaction disputes and prevent fraud. Look for a network that connects merchants, issuers, and technology partners for better data sharing.  Closing information gaps across the purchase journey can protect your business from friendly fraud.

Both issuers and cardholders get purchase information through their bank app. When buyers can identify purchases, there are fewer disputes due to transaction confusion. It improves the overall customer experience and reduces first-party party fraud and chargeback costs. On the other hand, merchants can derive insights into fraud, chargeback, and decline data.  With this information, they can take steps to prevent and remedy fraud.

Small merchants need to implement proactive measures to protect their businesses in the face of growing first-party fraud threats. Besides saving your business from losses, these measures can enhance customer loyalty and trust. They create a safe environment for both your finances and customer relationships.