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Chargebacks are always an issue for merchants. While there are numerous programs and indicators to identify fraudulent ones, detecting and managing first-party fraud—that committed by legitimate customers—can be tougher to root out.
In response, Mastercard Inc. is pushing its First Party Trust Program, an artificial intelligence-based service that enables merchants to share information to prevent first-party fraud, also known as so-called friendly fraud.
Announced Monday, the Mastercard initiative is a new push for a program the network originally outlined in October. Mastercard says the program was developed in collaboration with merchant-industry groups. Its launch has been slated to begin in 2024, in the United States first.
Mastercard provides two paths for sharing detailed data about first-party fraud, as part of the transaction or post transaction, as part of the dispute process. The program uses AI and risk modeling to help identify genuinely fraudulent transactions, known as third-party fraud, and spotlight better data for issuers to know more about the potential purchase.
The First-Party Trust Program will help merchants share data in existing channels and help protect them from fraudulent disputes, Mastercard says. “By confirming the absence of any of the usual hallmarks of identity theft, the First-Party Trust program can expose first-party misuse,” the network says.
“Merchants have limited defenses in these disputes today, which leaves them vulnerable and exposed, ultimately undermining trust in e-commerce transactions,” Dennis Gamiello, Mastercard’s executive vice president of identity products and innovation, says in a statement.
First-party fraud is not new, says David Mattei, strategic advisor of the fraud and anti-money laundering practice at Boston-based Datos Insights. “Unscrupulous consumers know how to ‘play the game’ and get around paying for goods they have purchased,” Mattei tells Digital Transactions News via email. “They know the rights words to say when disputing a charge with their financial institution (FI) and FIs are compelled by federal regulations (Reg E for debit cards and Reg Z for credit cards) to properly process a cardholder dispute. It doesn’t help that there are how-to videos on YouTube to do this.” Recent Datos Insights data found that 50% of 200 U.S. and U.K. merchants said first party fraud was increasing.
“The industry has the data to solve this problem; the only issue is that some of the data is with merchants and some with FIs,” Mattei says. “Programs such as Mastercard’s First Party Trust provide a mechanism for merchants and FIs to share data to combat this form of fraud. This is welcome news for both parties as these otherwise valid transactions performed by the cardholder consume valuable internal resources and increase their costs.”
The program also should help streamline the chargeback process, Mastercard says. “When a customer contests a charge, Mastercard can use the information to make quicker liability decisions—without further demands on the merchant. If the analysis suggests first-party misuse, the issuer can also present that data to the customer to see if they want to cancel their claim,” it says.
Participation is optional. Online-fraud detection providers Forter and Kount are among the first to join the program.
Mastercard is not alone in trying to stem friendly fraud. Visa Inc. in 2023 changed its rules to standardize the way data and evidence are accepted for disputes. Merchants will be able to use data they have on hand to create a historical footprint of the relationship between cardholders and merchants.
Visa introduced Visa Resolve Online, a platform that clients use for disputes that can assess and validate that the information supplied by the merchant meets the rules criteria.
