Visa Launches Tool For Merchants To Fight Friendly Fraud

April 20, 2023
Compelling Evidence 3.0, Visa’s new fraud-fighting tool aimed at preventing invalid chargebacks, goes live as friendly fraud tops merchant concerns.

Compelling Evidence 3.0, Visa’s new fraud-fighting tool aimed at preventing invalid chargebacks, goes live as friendly fraud tops merchant concerns.

On Saturday (April 15), Visa’s new tool called Compelling Evidence 3.0 (CE3.0) went live, which aims to fight what merchants call friendly fraud.

Friendly fraud happens when a credit cardholder disputes a legitimate purchase and requests a chargeback.

It may take various forms, including when a consumer does not recognise a transaction on their bank statement, they refute valid purchases such as long-forgotten recurring subscriptions, or claim a purchase was made by their child accessing their card.

CE3.0 allows sellers to defend a legitimate transaction by proving that the cardholder participated in the transaction and it should not be deemed fraudulent. The sellers can do so by providing details of a pattern of prior legitimate transaction history.

If Visa’s criteria is met, the dispute will be blocked and liability for the transaction will stay with the issuer.

To be eligible, the merchant must provide at least three of the following evidentiary data points: email address, shipping address, IP address, user login, or device ID/ device fingerprint. They must also show that there were at least two non-disputed transactions on the same payment method between 120 and 365 days prior to the date of the disputed transaction.

CE3.0 protection applies to Visa disputes that are categorised as “10.4 other fraud - card absent environment”. This code indicates that the cardholder did not authorise or participate in a transaction carried out in a card-not-present (CNP) environment such as via the internet, mail or phone.

Merchants can pre-file these data points even before the initiation of a dispute or in response to that. In either case, the filing of a dispute does not impact the merchant’s fraud ratio.

Rise of chargeback

Chargeback rules are standard consumer protection offered by card companies that give consumers confidence in using their cards knowing they can claim back if something goes wrong.

These rules supplement distance selling rules which offer a cooling-off period for consumers to cancel online purchases without giving a reason. In the US, consumers can exercise this right within three business days of the sale, while they have seven working days to do the same in the UK after receiving the item and 14 days in the EU.

Visa CE3.0 will target chargebacks that occur after these statutory cooling-off periods.

Chargeback rules pre-date the significant rise in digital commerce and in recent years CNP sales have grown significantly, which has also increased the number of disputed transactions.

Visa said that between 2019 and 2021, while its annual CNP sales grew 51 percent, disputes grew nearly 30 percent globally. The card giant estimates that friendly fraud may account for up to 75 percent of all chargebacks.

Meanwhile, another report estimates that, in 2022, 32 percent of merchants experienced friendly fraud.

The card networks have launched various initiatives to fight friendly fraud.

Mastercard, for example, offers Ethoca to reduce cases resulting from fraud, transaction confusion and first-party misuse.

Transaction confusion happens when the cardholder does not recognise a transaction on their bank statement. That is because they typically see only the amount charged and an alphanumeric code of the merchant.

Ethoca Consumer Clarity connects the merchant with the issuer to allow for the sharing of purchase information, such as merchant names, logos, geolocation data and itemised receipts. According to Mastercard, this helps reduce confusion that often leads to friendly fraud disputes.

It aims to protect against first-party misuse by providing clear details, in digital bank apps or with call centre or back office agents, that can help distinguish legitimate purchases against illegitimate ones.

Ethoca Alerts also helps merchants and issuers quickly share transaction dispute information, allowing merchants to more quickly resolve a dispute by refunding the order and cancelling the fulfilment of goods to avoid the chargeback.

Such a digital-first approach helps prevent chargebacks by addressing the common causes of disputes, a Mastercard spokesperson explained to VIXIO.

Visa’s latest tool is particularly useful for subscription sellers, according to the company, which are especially prone to this form of “fraud” because cardholders forget what they subscribed to or fail to cancel the service.

Although it should be noted that some subscription services have been called out in the US for taking advantage of consumers not knowing or forgetting what they subscribed to.

For example, both the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) have increased their crackdown on so-called dark patterns, which trick consumers into subscriptions they do not want.

Although requesting a chargeback for a wrong purchase is often legitimate and a cardholder's right, several reports indicated that the system has been increasingly exploited in the US.

According to a report by Sift, in the last quarter of 2022, 23 percent of consumers who have filed a chargeback dispute admitted to submitting false fraud claims on legitimate purchases to get their money back. It grew from 17 percent in the year before.

Some merchants hire specialist companies that provide services in mitigating chargebacks, but these too have fallen foul of regulators.

Last week, the FTC sued Chargebacks911 alleging the firm used unfair techniques to turn down consumer disputes.

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