Fighting Fraud with Big data Technology for Merchants

In recent years, the development of new technologies has provided numerous creative ways for criminals to commit fraud, which costs time and resources for retailers if such fraudulent activities are not detected and prevented in time.

Especially given the consumer protection laws such as, Fair Credit Billing Act, without any anti-fraud protection laws for merchants that prevent misuse of such consumer protection laws by fraudsters, the onus of playing safe is entirely up-to the merchant now.

Fair Credit Billing Act

The Fair Credit Billing Act is a federal law enacted to protect consumers from unfair billing practices, such as unauthorized charges, charges for unaccepted or undelivered goods and services and other disputed charges. Among its most important consumer protections: Your maximum liability under federal law for unauthorized use of your credit card is $50.
However, often fraudsters exploit this to their benefit to commit, what is usually known as a, friendly fraud, through a process known as charge-back.


Chargeback is the mechanism by which the consumer disputes a charge made by a merchant on their card, often mentioning the reason that the service promised by the merchant was not provided, or even worse, they did not even make the purchase.

In such cases, the payment processors conditionally revert back the money to the consumer and start a dispute resolution process, which may often span across 60 to 90 days. Merchants may win the dispute if they can provide enough proof of delivery of the product/service. However, for merchants in the e-commerce business, dealing with intangible goods such as digital download, online memberships so on, establishing a proof of delivery is not so easy.

For most of the merchants, dispute by the consumer is not the major source of problem. All genuine merchants would be happy to refund the money for the consumer if they are not happy with the service provided. Rather, where the problem comes for the merchants is: the costs associated with the charge-backs. Banks/payment processors place additional charges on the merchants for any charge-back claim made by a consumer against them. There is no regulation on these charge-back costs and payment processors such as Paypal are known to charge the merchants anywhere upto $20. This in addition to the refund of the original amount to the consumer.

What should banks/payment processor do to help prevent friendly fraud?

  1. Charge-backs (raising a dispute against the merchant) are fundamental rights of any consumer as per law. Banks and card processors should respect this right and implement the law, at no additional costs to the merchant. It is indeed questionable that banks charge money from merchant to implement federal law.
  2. Banks and card-processors should compulsorily implement personal verification (such as verified-by-visa) at the time of order placement, to ensure the person who is placing the order is indeed the person who owns the card.
  3. Any charge-back claim by a consumer on the reason of card-misuse or account misuse – should be met with strong actions such as cancelling the card and account to prevent any further misuse by others. It is well-known that payment processors such as Paypal, in-spite of receiving charge-back complaints from consumers on the grounds that the orders were made without their knowledge and that their account was misused, continue to let them operate the accounts, which only encourages further fraud (either by merchant or consumer). Compromised accounts and cards should be disabled at the first hint of charge-back minimizing further misuses.
  4. Maintain a list of previous charge-back consumers and verify any new orders against that list, warning the merchant of any potential charge-backs they may face. The merchant can then either accept the order and offer a genuine satisfactory service to avoid potential charge-backs, or reject the order and eliminate the thread of fraud.
  5. Implement real-time fraud detection mechanism to keep track of consumer behavioural profile and identify any sudden deviations in their shopping patterns.

Big-data technologies offer real-time stream processing capabilities to analyze the click-stream data collected from web-logs and e-commerce shops, to detect and eliminate any potential fraud-threats the merchant may become subjected to. Known as Complex Event Processing, the technology identifies and analyses events from different sources in real-time and detects patterns of (mis-)use.

C-Level Executives, Project Managers, System architects and Designers may take advantage of these fraud-detection techniques by learning to implement them in their (or their client’s) business operations. My-Classes.Com offers courses on these fraud-detection and prevention techniques as part of its business analytics course curriculum. Pick any upcoming live-class or subscribe to the updates to get notified about one.