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Help is on the way for merchants that are swamped with friendly-fraud chargebacks. Friendly fraud occurs when a customer makes a legitimate purchase, then requests a refund, often because the consumer has forgotten the transaction took place.
Visa is introducing its Compelling Evidence 3.0 rule set, which allows merchants to submit historical purchase evidence to prove a legitimate cardholder was behind an order. The rules are based on the assumption that if a cardholder has engaged in previous transactions with a business and those transactions were not disputed, then the current transaction is not fraudulent.
The new rules require the same data elements to match across undisputed and disputed transactions, with transactions using the same payment method and settled at least 120 days prior to the dispute. Importantly, the new system allows evidence to be submitted before a chargeback is filed. If certain elements are decisively proved, the fraud claim will be denied.
For merchants, this is all good news that is likely to reduce their chargebacks dramatically, but it also means they must get their data collection in tip-top shape to meet the standards of Visa’s new rules.
In a recent podcast, Navin Sequeira, VP Global Chargeback Operations at Chargeback Gurus, and Brian Riley, Head of Credit at Javelin Strategy & Research, discussed the size of the friendly fraud problem for merchants, how VISA CE 3.0 rules are going to change the lives of merchants, and how merchants can best prepare. This article provides some of the key highlights.
Friendly Fraud: The Nemesis of Merchants?
Friendly fraud is a growing issue for merchants, causing significant financial losses and reputational damage. This occurs when a cardholder disputes a legitimate transaction, often because of confusion or forgetfulness, but such disputes can also result from deliberate misuse of the chargeback system.
From the merchant’s perspective, if the same cardholder has made similar purchases in the past without disputing them, there is a good chance that the transaction in question is also legitimate. However, current Visa regulations don’t require banks to consider this evidence, making it easier for customers to commit friendly fraud.
“Estimates suggest that friendly fraud accounts for 60 to 80% of all chargebacks, which cost merchants approximately $40 billion annually,” Sequeira said.
The impact of friendly fraud is far-reaching, with costs including the value of the disputed sale, chargeback fees, administrative expenses, and lost revenue. Reputations can also suffer, particularly if chargebacks result from misunderstandings or mistakes, thus leading to increased scrutiny from payment processors and financial institutions.
“Focusing on that largest population (friendly fraud) really makes a big difference when you’re managing the fraud process and looking where the vulnerabilities are,” Riley said.
What is Visa CE 3.0 and How Will it Help Prevent Friendly Fraud?
On April 15, Visa will introduce Compelling Evidence 3.0 (CE 3.0), the latest version of its CE process, which includes enhancements designed to help prevent friendly fraud chargebacks and remedy card-not-present fraud disputes.
To prove a dispute is associated with two previously undisputed transactions, sellers will need to provide three classes of evidence:
- Item descriptions and/or proof of merchandise or services provided.
- Evidence of two previous transactions processed and settled between 120 to 365 calendar days before the current dispute.
- Data elements about the device used, including device ID or fingerprint and IP address, that match the two prior transactions. Other elements can also include login ID and delivery address.
Sequeira notes that using multiple data elements about the device used for payment is crucial in preventing chargebacks, as sometimes one data element is not enough to make a case.
“I could make the first order at home, and tomorrow I could make a second order at the beach with a different IP address,” Sequeira said. “If there is a chargeback, and the only device data element that is submitted is the IP address, Visa will say that’s not a match. But if device ID is also submitted, the picture becomes clearer.
While the exact impact of this new regimen is difficult to predict, it is reasonable to assume that the new rules will reduce chargebacks.
However, merchants need to put in considerable IT work to collect and store the required data for CE 3.0, then retrieve and pass on the data in less than two seconds to respective channels. With cost-cutting, layoffs, and macroeconomic factors, many merchants may not have the budgets to make these changes. As a result, many will partner with third parties to implement the system.
“Bringing in experts on this to deal with this important function within payments is really important,” Riley said. “It’s just like with taxes—do you want to do your own taxes, or do you want to deal with the IRS directly? The same thing applies here: Bringing in an expert makes a lot of sense, just as a normal course of business.”
To prepare for CE 3.0, merchants should determine if they have the necessary data elements to implement it, then work with their chargeback management company and IT teams to ensure compliance. Although the pre-dispute stage will not be more time-consuming with CE 3.0, the post-dispute stage could be if merchants do not upgrade their systems.
“If merchants do not have the ability to record all of these data elements and retrieve it when a chargeback comes in, it’s really essential for them to really strengthen what they’re doing,” Sequeira said.
CE 3.0 is designed to fight specific types of fraud, and not all merchants fit the bill. Furthermore, merchants can choose how much effort and money make sense to put in based on how many 10.4 (card not present) chargebacks they have.
“Merchants have to look at how many 10.4 transactions they have when compared to the rest of the results,” Sequeira said. “If it’s a small subset, if the dollar value is not very high, then they may want to continue with what they’re doing. But if they have a very large population of 10.4 transactions and the dollar value is high as well, they should evaluate with their IT and finance team putting into place a chargeback strategy.”
In any case, Visa is offering more tools for businesses to dispute certain kinds of chargebacks. So even if a merchant is not in a place right now where this solution is needed, it could be helpful in the future.