By Ken Musante
Napa Payments and Consulting
Editor's Note: This article was previously published by Payments Consulting Network, https://bit.ly/3Wu9g01, and the Napa Payments and Consulting blog, https://bit.ly/3PLUWxJ. For additional blog posts or podcasts by payments leaders, visit our Community Voices page, www.greensheet.com/communityVoices.php.
Friendly fraud is an oxymoron. Like deafening silence, it pierces the frontal lobe. There is neither solace nor refuge. It’s sponsored thievery. Merchants have reluctantly harbored its weight for the benefit of accepting card payments. Mercifully, there may be some measured relief in the coming months.
Friendly fraud is a type of cardholder fraud. Visa estimates friendly fraud makes up 75 percent of all chargebacks. A customer purchases an item online and then disputes the item, even though it was either a legitimate transaction or authorized by someone else in their household. It is perpetrated for numerous reasons. The reason may be an honest mistake such as the cardholder does not recognize or recall the charge. They may have granted authorization to another person and forgotten they had done so. It may, however, be for a more deliberate actions such as:
Some merchants have gone to great lengths to recover their money even though they lost the chargeback dispute. For example, merchants have found websites, stood up by individuals who acquired their product through friendly fraud. The merchant loses the chargebacks and then has to engage with counsel to shut down the website.
Further frustrating merchants is that Visa has a Rule whereby merchants exceeding a 0.90 percent chargeback ratio will face a stiff and escalating fee schedule. They may also be closed by their acquirer and added to MATCH, which is excruciating and renders it difficult to obtain merchant processing.
Regarding honest mistakes, there are some actions a merchant may take to lessen those dispute types. Proactive notifications, obvious descriptors and liberal return policies, are amongst the many actions a merchant may take to lessen honest mistakes. Merchants can and should analyze data for commonalities and adjust practices when warranted. Further, with pending Rule changes to Visa’s Dispute Resolution Rules, friendly fraud chargebacks may be mitigated.
Until now, it was very difficult for merchants to win disputes in a card-not-present environment. This is impactful as COVID accelerated the shift to ecommerce. Between 2019 and 2021, annual Visa card-not-present transactions grew 51 percent. To assist merchants, beginning April 15, 2023, merchants will be able to counter friendly fraud for specific consumer dispute chargebacks.
According to Verifi’s website, “Compelling Evidence 3.0 (CE3.0) evolves the Visa dispute program by adding a set of checks and balances to draw a clear and direct relationship between the merchant and the cardholder with the use of greater data exchange to more accurately identify transactions authorized by the cardholder…”
For Dispute Condition 10.4: Other Fraud—Card-Absent Environment, this may be a remedy. If the goods or services were provided and the same payment credential was used in two previous transactions that the issuer had not reported as fraud. At least two of the core data elements match between prior (undisputed) transactions and the disputed transaction and one of the two must be either IP address or device ID.
This is welcome news for merchants. Merchants should consider these pending changes and evaluate the types of chargebacks they are receiving to prepare for the coming changes. For example, if a merchant is aware it is receiving a significant volume of this type of consumer dispute chargeback, it should validate that it has the necessary data and process to refute them come April 2023. By doing so, it will be better prepared to dispute and win against friendly and unfriendly fraud.
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at kenm@napapaymentsandconsulting.com, 707-601-7656 or www.linkedin.com/in/ken-musante-us/.
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