Mastercard Targets Friendly Fraud With First-Party Trust Program

Mastercard has launched a program designed to help merchants battle “friendly fraud.”

The company’s First-Party Trust program, announced Monday (Oct. 23), employs “enhanced transaction insights,” artificial intelligence (AI), and risk modeling to combat friendly fraud, which occurs when a customer mistakenly or intentionally challenges a purchase.

“As more of our spending happens digitally, it has never been more important to reduce friction in the transaction process for the benefit of all parties involved,” Ajay Bhalla, president of Cyber and Intelligence at Mastercard, said in a news release.

“That’s why we are bringing our world-leading AI, identity and dispute resolution technologies to enhance the experience and reduce risk to businesses.”

Mastercard said small businesses will find the First-Party Trust particularly valuable, as it helps them with once-burdensome time and resource-intensive issues, like researching and addressing claims.

“Issuers will be able to more accurately determine what is a third-party fraudulent transaction as opposed to first party fraud and will have more reliable information when discussing disputes with their cardholders,” the company said.

PYMNTS looked at the issue of friendly fraud — sometimes called “first-party fraud” — earlier this year in an interview with Mike Lemberger, head of risk for North America at Visa.

He said this type of fraud makes up as much as 16% of fraud disputes, as estimated by the Merchant Risk Council.

“The term first-party fraud came out years ago,” he said, noting that it first referred to parents finding out that their kids, or other relatives, had charged purchases to their elders’ cards — and the items showed up on the monthly billing statement.

Now, however, fraudsters have been looking at the way the commerce ecosystem has protections in place — where networks such as Visa have zero liability policies, Lemberger said. Those policies are a guarantee by the card issuer that cardholders can’t be held responsible for unauthorized charges processed on the network.

“If the transaction is not authorized, you have a right to dispute it and get the funds back,” Lemberger told PYMNTS.

And friendly fraud is just one piece of a bigger fraud puzzle. PYMNTS Intelligence has found that fraud has climbed by 43% at financial institutions (FIs) compared to 2022, with the average cost of fraud surging by 65% for FIs with assets of $5 billion or more.

“Misuse of account information remains the leading source of fraud, accounting for 38% of fraudulent transactions,” PYMNTS wrote recently. “Notably, digital wallets like Samsung Pay, Google Pay and Apple Pay, as well as same-day automated clearing house (ACH) and regular ACH payments, have also seen significant increases in fraud rates since 2022.”