Digital commerce is booming. Between 2019 and 2021, card-not-present transactions climbed over 50 percent across the Visa network. By 2025, analysts expect online purchases to constitute a quarter of global retail sales.
That’s great news for digital sellers. But alongside surging card sales, eCommerce merchants are seeing a worrying increase in “friendly fraud,” with illegitimate chargebacks and reversed transactions taking a big bite of their revenues. Today, businesses are losing an estimated $125 billion due to the reversal of legitimate transactions.
Fortunately, change is on the horizon. Visa recently announced that next April, it will introduce new rules intended to lessen the chargeback burden on digital merchants. That’s good news for sellers — if they have the infrastructure in place to win disputes.
Expanding the rulebook
Visa regularly refreshes its rules and procedures around payment disputes to help build customer trust while also supporting retailers. Under the current system, the network allows merchants to challenge chargeback claims if the cardholder’s IP address, email address, street address, and telephone number match a previous unchallenged transaction.
From next year, though, new standards called Compelling Evidence 3.0 (CE 3.0) will require sellers to provide matching details from two unchallenged previous transactions that used the payment card in question. If this information is provided in cases where fraud was claimed by the cardholder, merchants will be able to successfully shift liability for the transaction to the issuer.
By tightening up the rules, Visa hopes to establish a crystal clear connection between the customer and the merchant, making it easier to demonstrate that the cardholder did (or did not) participate in a contested transaction.
How CE 3.0 helps
Due to a litany of hidden costs, the average merchant typically loses 140 percent more than the original transaction value for every chargeback case they lose or forfeit. Visa’s more rigorous CE 3.0 system should, in theory, reduce the number of such cases retailers lose.
After the new rules come into effect, merchants will be able to submit evidence countering fraud claims in the pre-dispute phase, as well as after a dispute has been filed. If the right evidence is submitted quickly, a claim can be dismissed before even becoming a full-blown chargeback.
For digital sellers, this is important because even successfully contested chargebacks contribute toward a merchant’s chargeback-to-transaction ratio. If that number reaches 0.9 percent, the merchant is at risk of fines, increased processing costs, or even having their card processing rights rescinded.
Ahead of the curve
To achieve quick and accurate responses to transaction disputes, merchants will need robust chargeback management capabilities. Visa’s new update makes it possible to nix bogus disputes early, but only if merchants put effective systems in place to collect, organize, and store customer data intelligently.
Meeting Visa’s new requirements won’t be easy for merchants, particularly those who lack chargeback expertise. Building an in-house mitigation team is costly and time-consuming, and third-party services often lack the agility required to negotiate new regulations.
It’s for this reason that many digital merchants are turning to technology. Automated chargeback mitigation solutions can now combine the power of artificial intelligence, data analytics, and machine learning to gather relevant, case-winning evidence in the blink of an eye without the need for manual input.
The key is to find a solution that provides the efficiencies of automation, but doesn’t just apply a cookie-cutter approach to every single chargeback dispute. Human insight and industry-specific expertise will remain important as companies seek to win disputes under CE 3.0.
More changes ahead
When announcing CE 3.0, Visa noted that the new rules were part of a wider, multi-year program responsive to market trends. Other card payment networks have acknowledged the need for regular updates to reduce the burden of chargebacks, with Mastercard recently overhauling its rules for recurring payments.
With more chargeback-related updates in the pipeline, the ability to adapt and leverage changing rules will be vital for merchants.
The smartest sellers know that CE 3.0 isn’t simply a new set of rules that must be adhered to; it’s also an opportunity to build out chargeback capabilities that deliver real results, minimize revenue losses, and provide the future-proof infrastructure needed to defend against friendly fraudsters.
The author, Roenen Ben-Ami, is co-founder and Chief Risk Officer of Justt.ai, and an expert in the field of payments and chargeback mitigation.
