Financial fraud spans a vast spectrum of misleading methods, each intended to exploit vulnerabilities in our financial systems. The perpetrators have increasingly gotten smart and use a variety of strategies to manipulate trust, leaving their victims in financial ruin, from Ponzi schemes and investment scams to identity theft, payment, and insurance fraud.

All these scenarios and situations can also be loosely termed as the side effects of living in a digital age where the word “real-time” reigns supreme.  We are so used to the instant payments that happen on the go. Just open the app, scan the code or input the phone number and voila you have made a payment. Likewise, it is also quite a child’s play to get scammed as well. Sadly, the realm of real-time digital payments is eclipsed by the rise of financial fraud. Also, it sparks the debate of real-time payments vs real-time financial dispute resolution.

Adding a bit more context, an FTC survey conducted in February 2023 revealed that financial frauds are at an all-time high, in fact, it is above 30% above the volume of financial frauds in 2021. And over 42% of Indians have gone through financial fraud during the past three years.

When the term financial fraud is mentioned, investment schemes, securities fraud and now the latest crypto fraud are the highlight of any conversation.  We tend to overlook the fraud happening in the payment industry as it is often the result of our own mistakes. And as luck would have it, most victims of payment fraud are often embarrassed to report it. 

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The usual procedure of resolving financial fraud online hinges on the victim contacting their bank and sharing every detail about the fraud with the authorities and waiting for a resolution. This wait translates to multiple follow-ups with different financial authorities like banks, payment apps or even the sector’s ombudsman as the last resort. This whole process leaves the victim exhausted and distressed.

Furthermore, the shame of being conned stops these victims from reporting any type of crime. While this is one end of the spectrum, there are people who come forth and lodge a complaint with their bank or central authority, yet they meet with little success. 

And as the old adage goes, consumer awareness is the key to lowering the instances of financial fraud. Nevertheless, there must be systems in place to protect individuals from scammers trying to pry information. As of March 2023, banks and payment operators have reported a payment fraud volume of Rs.1,750 crores due to the increase in online payments.

When decoding the types of payment fraud, identity theft and credit card fraud get top marks, but the category of chargeback fraud comes up in close competition. Also known as friendly fraud in common lingo, this category of fraud is grossly overlooked. While identity theft and credit card fraud involves a third party who hacks the cardholder details, so is not the case with friendly fraud.

Friendly fraud happens when a customer disputes a legitimate transaction claiming that they have no knowledge of the transaction or that they have not received the product. Card networks like Visa, and Mastercard have their signature Fraud & Risk Management systems to combat criminal fraud. Also, banks have security policies and systems in place to address criminal fraud, yet the current system is not equipped to identify friendly fraud done by cardholders.

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The pattern of criminal fraud recorded in these systems has helped in releasing timely policies and implementing necessary security protocols to protect cardholders from illegal elements. But when it comes to friendly fraud, the system cannot identify it as there is no data or pattern to fall back on.

To mitigate this risk, there is a card network mandate where a cardholder is restricted to only 15 chargeback requests during their card’s lifecycle. Yet, many are unaware of this fact and tend to game the system for illegal profits. That’s where the Reserve Bank of India (RBI) Online Dispute Resolution (ODR) system will play a pivotal role in resolving financial disputes online. This implementation calls for a completely digital system that can not only resolve disputes but also clip friendly fraud at its source.

If banks are equipped with a real-time fraud automation system, that can help in identifying a chargeback claim’s validity, it becomes easier to differentiate between criminal and friendly fraud instances. Segregrating every transaction manually is not possible as it involves huge resources and manpower to be deployed. But with tech at its core, banks can mitigate the risk of friendly fraud thereby contributing to the fact that automation will help in resolving financial disputes.

This article has been written by Praveen Krishna Dev, CEO, Backspace Tech.  

Disclaimer: The views and suggestions mentioned here are those of the respective commentators. The facts and opinions expressed here do not reflect the views of www.financialexpress.com. Please consult your financial advisor before investing.