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Friendly fraud is now reportedly the #1 fraud attack source.  Friendly fraud is when a customer makes a legitimate purchase, then makes a request for a refund.  Typically, the consumer has forgotten the transaction took place.

Visa is introducing its Compelling Evidence 3.0 rule set, which allows merchants to submit historical purchase evidence to prove a legitimate cardholder made the purchase. The new rules are based on the assumption that if a cardholder has made previous transactions with the merchant and a refund request was not made on those transactions, then the current transaction is not fraudulent.

The new rules require:

  • The same data elements to match across undisputed and disputed transactions
  • Transactions were made using the same payment method and settled at least 120 days prior to the dispute

Importantly, the new system allows evidence to be submitted before a chargeback is filed. If certain elements are decisively proved, the fraud claim will be denied.

For merchants, this is all good news and is likely to reduce chargebacks significantly, however it also means merchants must be accurately collecting the data to meet the standards of Visa’s new rules.

Friendly fraud is now reportedly the #1 fraud attack source affecting merchants. Often this occurs when a cardholder disputes (initiates a chargeback) a legitimate transaction, often because of confusion or forgetfulness, but disputes can also result from deliberate misuse of the chargeback system.

Friendly fraud is causing merchants significant financial losses and reputational damage.

From the merchant’s perspective, if the same cardholder has made similar purchases in the past without disputing them, there is a good chance that the transaction in question is also legitimate. However, current Visa regulations don’t require banks to consider this evidence, making it easier for customers to commit friendly fraud.  Friendly fraud accounts for 60-80 of all chargebacks and costs rough $40 billion annually with the average cost of a single chargeback expect expected to rise to $190 in 2023.

The impact of friendly fraud is far-reaching, with costs including the value of the disputed sale, chargeback fees, administrative expenses, and lost revenue. Reputations can also suffer, particularly if chargebacks result from misunderstandings or mistakes, thus leading to increased scrutiny from payment processors and financial institutions.

What is Visa CE 3.0 and How Will it Help Prevent Friendly Fraud?

On April 15, Visa introduced 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 remedy card-not-present fraud disputes.

To prove a dispute is associated with two previously undisputed transactions, merchants will need to provide three classes of evidence:

  • Item descriptions and/or proof of merchandise or services provided.
  • Evidence of two previous transactions processed and settled between 120 to 365 calendar days before the current dispute.
  • Data elements about the device used, including device ID or fingerprint and IP address, that match the two prior transactions. Other elements can also include login ID and delivery address.

For example, a customer makes the first order at home, and next day while at the beach make a second order which would have a different IP address. If there is a chargeback, if only the IP address was submitted, Visa’s system will determine that’s not a match. However, if the device ID is also submitted, evidence of friendly fraud becomes clearer.

CE 3.0 Preparation

To use the new system, merchants will need to put in considerable IT work to collect and store the required data for CE 3.0, then be able to retrieve and pass on the data in less than two seconds to respective channels.. With cost-cutting, layoffs, and macroeconomic factors, many merchants may not have the budgets to make these changes. As a result, many will partner with third parties to implement the system.

To prepare for CE 3.0, merchants should determine if they have the necessary data elements to implement it. Merchants can view Visa CE 3.0 readiness requirements here.  If they decide to proceed, they then work with their payment processor and IT teams to ensure compliance. Although the pre-dispute stage will not be more time-consuming with CE 3.0, the post-dispute stage could be if merchants do not upgrade their systems.

Small Businesses Not Exempt

CE 3.0 is designed to fight specific types of fraud, and the new system will not be ideal for all merchants. Merchants who have a small number of 10.4 (card not present) chargebacks may not want to invest the time, money and effort needed. That said Jupiter Research estimates over the next five years, analysts predict that small and medium businesses will be hit with more than $130 billion in losses due to payment fraud.

In any case, Visa is offering more tools for businesses to dispute certain kinds of chargebacks. So even if a merchant is not in a place right now where this solution is needed, it could be helpful in the future.

Adapted from: New Visa Chargeback Rules Are a Game-Changer for Merchants –