It has been mere weeks since Visa and Mastercard introduced April 2023 updates to their fraud and chargeback guidelines. It has been heralded by some as a game changer in the fight against friendly fraud chargebacks. The new rules are intended to give eCommerce merchants a better chance to prove disputed transactions are false. It should, therefore, save on potential fees and penalties.
Although this move is aimed at helping merchants have more control of the chargeback process by providing compelling evidence at a pre-dispute stage, is it better to favour the merchant or customers? After all, isn’t the customer always right? Definitely not. There are ways of lowering chargebacks and fraud while maintaining the customer UX.
What are the updates to major card scheme chargeback disputes?
Prior to April 2023, Visa chargeback disputes, as part of the Visa Dispute Monitoring Program (VDMP), required only one previous transaction to match the same data attributes as the transaction in question. Those attributes include an IP address, email, physical address and telephone number, all of which had to match between all transactions.
Now with the updated Visa Compelling Evidence 3.0 (CE 3.0) initiative, it is down to merchants to match at least two transactions or more from 120-365 days previously. All transactions must have a matching IP address or device ID (one of these two is compulsory). It must also have other data attributes, such as customer account ID and a delivery address. The same payment method must also match.
Mastercard introduced a similar measure to its chargeback guidelines. It requires merchants to prove that disputed transactions were authenticated by a user with 3DS2.0 or that the transaction was verified using a CVV code. Evidence of user authentication helps prove the chargeback request is false and can therefore be declined.
In all new cases, the chargeback request is then passed to the card issuer. They must investigate, with compelling evidence at their disposal, whether or not the cardholder is making a false claim or not. If there is no reasonable explanation for the chargeback request, it is declined by the issuer and does not contribute to a merchant’s chargeback ratio.
Why the need for updates?
The ultimate aim is to fight fraud. However, according to Visa, in 2021 alone, 77.5% of their instances of fraud were classified as dispute reason code 10.4 (card-not-present fraud). It is the most commonly used code. Now consider that 75% of these chargeback disputes were attributable to first-party misuse. That means friendly fraud – disputes initiated by dishonest customers or users who question legitimate transactions for online subscriptions they have long forgotten about or do not recognise on their statements.
Before April 2023, merchants had a lower-than-average success rate when challenging chargebacks. For some merchants, chargebacks were simply considered time-consuming and costly. Many opted to process a refund and focus on maintaining a positive customer experience.
This is possible if you are a big eCommerce company. However, for smaller companies, it can lead to a huge loss of revenue, chargeback fees and, in the case of exceeding accepted chargeback thresholds, potentially being added to a fraud monitoring program. The longer chargeback and fraud thresholds are exceeded, the more the monthly fines grow. It can ultimately lead to a merchant’s termination from a card scheme.
While focusing on customer UX is important, measures should be taken not to entice fraudsters to take advantage of company policies. Fraudsters have been aware for years that they could make chargeback claims and often win. They exploited companies that were more concerned about maintaining a positive online reputation. In turn, it encouraged continued chargeback attempts by fraudsters, leading other threat actors to do the same with stolen eCommerce accounts.
In the case of dishonest customers, initial success in making a false claim reinforced negative behaviour. It resulted in further, often successful, chargeback claims. Friendly fraud has been a growing problem for years. Now that new guidelines are in place, how are merchants dealing with them daily?
The practical implications of new guidelines for eCommerce merchants
Large eCommerce players have the means to soak up the financial consequences of avoiding chargebacks by issuing refunds. Accepting this strategy is, as previously mentioned, quite risky. In the long run, it can lead to avoidable losses in the thousands. If small to medium-sized merchants were to take the same approach, they could face major and immediate cash flow problems.
Now consider the scale of the potential threats. Global eCommerce has been steadily growing for the last decade. The pandemic inevitably hastened that, leading to a growth in sales and the risk of fraud. Card-not-present sales, for example, rose by 51% from 2019 to 2021. But with this came a 30% increase in disputes, many of which were friendly fraud chargeback requests.
Online customers have also been impacted by recent increases in the cost of living brought on by rising inflation rates. It has contributed to increased attempts by customers to use friendly fraud chargebacks to avoid paying for subscriptions to online services and certain goods. It is especially common with the Buy Now, Pay Later (BNPL) payment model.
Along with chargeback dispute updates, Visa has also updated its fraud management program (VFMP). It has lowered accepted fraud thresholds and added more merchant category codes (MCCs) for increased fraud monitoring. It includes small ticket items, digital goods (media, games and apps) and subscription services prone to friendly fraud chargeback requests. Ultimately, fraud is a crime, neither friendly nor innocent, requiring increasing levels of monitoring.
The ingredients for further friendly fraud attempts already exist. But the end result doesn’t have to lead to an unnecessary loss of revenue. Anyone involved in risk and fraud management is watching with great interest to see the impact of the latest Visa and Mastercard updates on eCommerce. However, it is likewise important to be aware of existing solutions to these problems.
AI-powered solutions can ease chargeback and fraud woes
There is no silver bullet to resolving chargeback disputes. An integrated approach is necessary to include AI-powered tech solutions, but human input and company policies can also have a positive effect. Smoother online experiences for customers to reach checkouts and dispute solutions can be implemented to diminish the need to make a chargeback request. Good customer service can lead to positive outcomes – of course, to the benefit of genuine customers with legitimate concerns and disputes.
Human input can provide a friendly-facing approach to chargeback disputes. However, the new Visa and Mastercard guidelines allowing merchants to provide evidence can have one potential drawback – collecting all the evidence, can be time-consuming. An overreliance on manual processes can in itself be time-consuming and costly. It can be remedied with automation.
The best overall approach is to combat chargebacks not just at the pre-dispute stage but also in line with effective fraud management. With real-time data analyses, detecting and preventing fraud and dishonest customers is possible. Both of which can make chargeback requests.
AI-powered anti-fraud systems, for example, use behavioural biometrics to identify potentially suspicious user behaviours and device and network setups. Likewise, with automatic chargeback monitoring, these same anti-fraud measures can identify friendly fraud chargeback attempts. It allows them to be remedied even before they are sent to the issuer as a dispute. In this respect, the best defence against all types of fraud is to understand the intentions of all online service users, preventing fraudsters and dishonest customers before they can do any damage.
Nethone is a machine learning-based fraud prevention SaaS company that enables eCommerce merchants and financial institutions to holistically understand their end-users — also referred to as Know Your Users (KYU). With our proprietary online user profiling and AI-powered tools, we can block all risky users without friction to the good ones by exhaustively screening every single one. Nethone is also part of the MangoPay Group, a pan-European provider of platform payment & wallet infrastructure, to offer enhanced anti-fraud capabilities catered to marketplaces and platforms.