February 23, 2024


For merchants inundated with friendly fraud chargebacks, help is on the way. Friendly fraud occurs when a customer requests a refund after making a legitimate purchase, usually because the consumer forgot that the transaction occurred.

Visa is rolling out its Compelling Evidence 3.0 ruleset, which allows merchants to submit evidence of historical purchases to prove that the legitimate cardholder was behind the order. These rules are based on the assumption that if the cardholder has previously conducted 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 both non-disputed and disputed transactions, the transactions use the same payment method and were settled at least 120 days before the dispute.Importantly, the new system allows for the submission of evidence forward File a chargeback. Fraud claims will be rejected if certain elements are conclusively proven.

This is entirely good news for merchants, potentially reducing chargebacks significantly, but it also means they must collect data at their best to meet the standards of Visa’s new rules.

In a recent podcast, Navin Sequila, VP of Global Chargeback Operations, Chargeback Gurus, and Brian RileyThe credit leader at Javelin Strategy & Research discusses the scale of the merchant-friendly fraud problem, how VISA CE 3.0 rules will change merchants’ lives, and how merchants can best prepare. This article provides some key highlights.

payment log

New Visa Chargeback Rules Change the Game for Merchants

payment log New Visa Chargeback Rules Change the Game for Merchants

Friendly Fraud: Merchant’s Nemesis?

Friendly fraud is a growing problem for merchants, causing significant financial loss and reputational damage. This occurs when a cardholder disputes a legitimate transaction, usually because of confusion or forgetfulness, but such disputes can also result from deliberate abuse of the chargeback system.

From the merchant’s perspective, if the same cardholder has made a similar purchase in the past and has not disputed it, there is a good chance that the transaction is also legitimate. However, current Visa regulations do not require banks to consider this evidence, making it easier for customers to commit friendly fraud.

“Estimates suggest that bona fide fraud accounts for 60% to 80% of all chargebacks, costing merchants an estimated $40 billion annually,” Sequeira said.

The impact of friendly fraud is far-reaching, with costs including disputed sale value, chargeback fees, administrative expenses and lost revenue. Reputation can also suffer, especially if the chargeback is the result of a misunderstanding or mistake, leading to heightened scrutiny by payment processors and financial institutions.

“When you’re managing the fraud process and looking for where the holes are, focusing on the largest population (friendly fraud) really makes a big difference,” Riley said.

What is Visa CE 3.0? 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 remediate card-not-present fraud disputes.

In order to prove that the dispute is related to two previously undisputed transactions, the seller needs to provide three types of evidence:

  • Item description and/or proof of goods or services provided.
  • Evidence of two prior transactions processed and settled between 120 and 365 calendar days prior to the current dispute.
  • Data elements about the device used, including the device ID or fingerprint and IP address, matched two previous transactions. Other elements can include login ID and shipping address.

Sequeira noted that using multiple data elements about the device used for payment is critical to preventing chargebacks, as sometimes one data element is not enough to make a case.

“I can place my first order at home, and tomorrow I can place a second order at the beach with a different IP address,” Sequeira said. “If there is a chargeback and the only device data element submitted is the IP address, Visa will say that doesn’t match. But if the device ID is also submitted, the picture becomes clearer.

While the exact impact of this new rule is difficult to predict, it is reasonable to assume that the new rule will reduce chargebacks.

However, merchants need to invest a lot of IT effort to collect and store the data required by CE 3.0, and then retrieve and deliver the data to their respective channels in less than two seconds. Due to cost cutting, layoffs and macroeconomic factors, many merchants may not have the budget to make these changes. Therefore, many will work with third parties to implement the system.

“It’s important to have an expert in this area to handle this important function in payments,” Riley said. “It’s like taxation—do you want to pay your own taxes, or do you want to deal directly with the IRS? The same thing applies here: It makes sense to hire an expert, as is the normal course of business.”

To prepare for CE 3.0, merchants should determine whether they have the data elements needed to implement it, and then work with their chargeback management company and IT teams to ensure compliance. While the pre-dispute phase of CE 3.0 will not be more time-consuming, the post-dispute phase may be more time-consuming if merchants do not upgrade their systems.

“If merchants don’t have the ability to record all of these data elements and retrieve it when a chargeback occurs, it’s really important for them to really reinforce what they’re doing,” Sequeira said.

CE 3.0 is designed to combat specific types of fraud and not all merchants are eligible. Also, it makes sense that merchants can choose how much effort and money to put in based on how many 10.4 (card not present) chargebacks they have.

“The merchant has to look at how many 10.4 transactions they have compared to the other results,” Sequeira said. “If it’s a small percentage, if the dollar value isn’t very high, then they probably want to continue what they’re doing. But if they have a large population of 10.4 transactions and the dollar value is also high, they should work with their IT and financial Together the team evaluates and develops a refund strategy.”

Regardless, Visa is giving businesses more tools to resolve certain types of chargebacks. So even if merchants are not where they need this solution now, it might help in the future.