What is Food Fraud and How Can the Food Retail Industry Prevent It?

What is Food Fraud and How Can the Food Retail Industry Prevent It?

Friendly fraud, card testing and identity theft are among the most common types of food fraud that can cost merchants substantially.

The globalization of the food chain has resulted in increased complexity and digital activity, meaning more opportunities for food fraud to occur. Since the COVID-19 pandemic forced many grocery stores, quick-service restaurants (QSRs) and other food industry players to pivot to digital technologies including mobile apps and contactless payment methods, food fraud has been prevalent in recent years.

According to a 2021 study from payment service provider CyberSource, three-quarters of the 650 merchants surveyed reported increases in both fraud attempts and fraud rates compared with pre-pandemic times. However, food fraud prevention is also on the rise as the industry continues to learn and adapt. 

Here are three types of food fraud that are the most prevalent in the retail sector of the food and beverage industry, and what grocery stores and QSRs are doing to prevent them.

Related: The Growing Importance of Food Industry Cybersecurity

Friendly Fraud

Also known as first-party fraud or chargeback fraud, friendly fraud occurs when a customer requests a refund from their bank or credit card after receiving a product or service, but claims non-delivery of goods, a non-processed refund or another issue. For example, a customer can place an online grocery order and receive it, but claim it did not arrive or certain items were missing in order to receive a full or partial refund. It’s what happens when dishonesty meets credit card transactions.

The solution? Fighting friendly fraud requires a multi-pronged approach that entails customer notifications, clear payment and return policies and verification measures designed to check customer identities. If a customer were to request a chargeback, they should be categorized and specified. Partnering with a payment service provider to prevent fraud is another way to prevent friendly fraud. 

Card Testing

Card testing is a type of food fraud by which a fraudster attempts to determine if stolen card information can be used to make purchases. Also known as carding, account testing or card checking, card testing ends up costing merchants substantially in authorization fees. Unfortunately for online food and beverage merchants, card testing is an unavoidable part of e-commerce.

Much like preventing friendly fraud, fighting card testing should entail a multitude of methods. This can include adding a captcha, such as Google’s reCAPTCHA, which is often effective for preventing card testing; adding rate limits which can be tailored to stop specific types of card testing; require a login or session validation; and detecting unusual activity by comparing it to typical legitimate traffic.

Identity Theft and Policy Abuse

Sometimes unbeknownst to customers, private information can often be stored in merchant payment systems. This makes it a prime target for fraudsters looking to steal this stored card data, loyalty points emails and other valuable personal information. Fraudsters may also try to exploit loopholes in discount coupons, welcome offers and other sales promotions.

Identity verification is vital in fighting identity theft, and this could entail finding a payment partner that can analyze and monitor account events. They can help identify account origination fraud and protect genuine user accounts from takeover by fraudsters. Tokenization, a data security tactic, can also be key to preventing identity theft issues.

According to Fraud Fighter, credit card fraud alone costs US retailers more than $100 billion annually, while coupon fraud can result in losses of $11 billion every year. As such, food fraud prevention measures are becoming increasingly important to the food and beverage industry in the digital era.