February 27th 2023

New Network Rules Give Merchants A Chargeback-Fighting Chance

On April 15 2023, changes to Visa’s dispute program – known as Compelling Evidence 3.0 - will come into force, aiming to provide a tool for merchants fighting friendly fraud online.

Global Market Insights Manager

Martha Southall

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Understanding Friendly Fraud

‘Friendly fraud’ is a form of First Party Misuse, and occurs when a cardholder files a dispute which becomes an invalid chargeback. In 2022, 32% of merchants experienced friendly fraud, making it one of the most prevalent forms of payment fraud online.¹ Hard to detect and even harder to prove, friendly fraud has been on the rise², with almost 1 in 4 consumers admitting to disputing a legitimate transaction.³

Why is Visa acting now?

In 2019, merchants absorbed 56.3% of losses from fraudulent transactions reported by covered issuers, a number that has been steadily rising since 2011 (Figure 1). That cost is only set to increase as, between 2019 and 2021, Visa reports that its CNP sales grew by 51% annually – accompanied by a 30% rise in consumers disputing those transactions.⁴ To help tackle the growing issue, trade groups such as the Merchant Risk Council and Merchant Advisory Group have worked in partnership with Visa to develop the updated framework.⁵

Figure 1. Who absorbs fraud losses reported by covered issuers?⁶

What's changing?

The key element of the coming update that merchants are talking about is a change to the evidence required when fighting chargebacks filed under Card Absent fraud (reason code 10.4). At its core is a liability shift: those transactions with ‘Compelling Evidence’ will now be the responsibility of the issuer, rather than the acquirer (and therefore the merchant).

What constitutes Compelling Evidence?

They’ve shopped with you before without issue - The consumer has made at least two undisputed transactions with the same Merchant ID.
The customer is definitely the same - Certain data elements (such as the IP address and customer account or login ID) match previously-undisputed transactions.
They’ve had chance to dispute the other recent purchases - The two prior undisputed transactions were made at least 120, but no more than 365, days before the current dispute.

Before, even if these requirements were met, the issuer could ask the cardholder if they would like to persist with the dispute and reject the merchant’s claim. Now, it will be the issuer’s responsibility to resolve a dispute with the cardholder when there is Compelling Evidence, and issuers cannot ignore challenges automatically made at the pre-chargeback phase.

Will the chargeback still count against me?

That depends. If the dispute has already become a chargeback, merchants will still have to submit their evidence via Visa Resolve Online (VROL). A successful claim won’t affect their fraud rate, but the chargeback would still count against them.⁷ However, for merchants using Verifi’s Order Insight, a Visa-owned plugin to the VROL platform, chargebacks can be prevented in the pre-dispute phase, leaving the merchant’s fraud and chargeback rates unchanged.⁸ In its documents, Visa suggests both pre- and post-dispute CE 3.0 transactions will not affect the Visa Fraud Monitoring Program.⁹

Next Steps for Merchants

For merchants looking to take advantage of the chance to reduce their chargeback burden, there are three questions to ask in preparation for April:

Data - Are you accurately recording the data points needed to satisfy the new requirements?
Partners - How is your acquirer, fraud partner or chargeback provider preparing to implement the changes?
A Holistic Defense - Are you employing the latest techniques to limit the likelihood that transactions leading to friendly fraud aren’t accepted in the first place?

The new rules are an opportunity for merchants to gain some much-needed ground when fighting first-party misuse, but they don’t form the whole picture. Visa estimates that merchants already spend 10% of their annual ecommerce revenues on fighting payments fraud¹⁰, and for the largest merchants that fight occurs all the way from the pre-auth phase to the months following a dispute. Why do they put in all that work? As well as protecting good customers, a lower fraud-to-sales ratio is directly linked to higher authorization rates, spelling ecommerce success for those with the data at hand.

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