Visa’s ‘Compelling Evidence 3.0’ Battles Friendly Fraud

Friendly fraud. First-person fraud. Call it what you will — maybe “mistaken fraud.”

For many merchants, purchase disputes and chargebacks are an unfortunate cost of business, one that’s been on the rise amid the great digital shift.

Illegitimate chargebacks — aka friendly fraud — occur when a consumer’s card is used in a legitimate transaction, but the consumer raises a dispute with their bank afterward.

The scenarios of why this occurs are seemingly endless. Perhaps a cardholder decides they don’t want to schlep down to the gym and cancel that membership that isn’t being used. So, they call the bank to dispute the latest monthly charge. Or one-half of a couple makes a purchase that the other doesn’t know about on the family card. Or, quite simply, the cardholder does not remember the transaction, or the billing descriptor on the statement doesn’t ring a bell.

The thinking goes: The merchant will give you a hard time. So, call the bank, dispute the transaction, and the bank will take care of it.

Mark Standfield, president at Midigator, told PYMNTS that “for years, merchants have been vocal about the fact that they’ve been dealing with fraud ‘issues’ like chargebacks that were not really fraud.”

But those same merchants have been at a loss to win the battle of proving the legitimacy of disputed transactions to banks and credit card companies. The results include hits to revenue, and higher fraud-to-sales ratios mean that they pay more to have transactions processed in the first place and often experience lower transaction approval rates.

Beginning in April, said Standfield, merchants will have a new tool to tackle friendly/first-party fraud head on. Visa’s “Compelling Evidence 3.0” — a change to its dispute program that goes into effect that month — will “give the merchants the ability to ‘prove’ their case that most transactions that have been designated by the issuing bank as ‘fraud’ are more than likely not ‘malicious’ fraud but it’s look-alike twin, a version of so called ‘friendly” fraud. And they’ll have the information to back that claim up.”

Now, beyond offering up a single transaction to demonstrate a legitimate cardholder made the purchase, merchants must validate at least two transactions that were processed on the same card more than 120 days before (120 days represents the general time frame that a transaction may be disputed) and were not disputed as fraud. Those transactions must be connected in some way to the transaction that is being called into question now. Some of the acceptable data points include, IP addresses, device IDs, shipping addresses or even biometric information.

If all the relevant data is offered within the time frame designated by Visa, the issuer will be blocked from processing that fraud dispute. Standfield noted that merchants can provide their evidence “pre-dispute,” during an Order Insight inquiry (the replacement of what used to be called retrieval requests) or after a 10.4 (Visa’s chargeback reason code) fraud dispute has been received by the merchant.

Upon being filed by the issuing bank through Visa Resolve Online (Visa’s dispute processing system), the disputed transaction will be “checked” against previous transactions on that same card, with the same merchant. If there are two or more transactions on the same card, with the same merchant, then the merchant will be given the ability to provide the acceptable data elements in the new Compelling Evidence 3.0 rule.

CE 3.0 represents the first rules change of its kind that specifically provides merchants with the opportunity to reverse the fraud status applied to a transaction associated by reason code 10.4: “other fraud, card-absent environment.”

Getting Ready for the Change

There’s some prep work that needs to be done by the merchants who wish to benefit from the new standards, said Standfield. They’ll have to make sure they have the correct compelling evidence data stored in an accessible system (which must be retrieved in a matter of seconds and submitted to Visa’s Order Insight inquiry), otherwise the transaction being disputed will skip over the CE 3.0 rule and continue to be processed as a traditional Allocation (Visa’s designation for fraud) dispute.

Collecting, analyzing and submitting that data requires the right partnerships, said Standfield, as the technical heavy lift may prove too onerous for many tech-restrained merchants.

Looking ahead, at a high level, the new CE 3.0 rule change may help to block (or reverse) a significant amount of “mistaken” fraud. But Standfield noted that there’s no “magic bullet” that will stop all first-party fraud in its tracks.

“You need a combination of things,” he said.

A multistep strategy entails a “check” during the pre-authorization stage, where merchants should establish, through fraud detection systems (such as offered by Kount), that a customer is who they say they are. That first line of defense, along with a complete post authorization mitigation strategy, so to include CE 3.0, can help merchants minimize the potential for friendly fraud chargebacks and the loss of revenue that goes along with it.

“If you have lower fraud and chargeback ratios,” Standfield told PYMMTS, “you’re going to see increased transaction acceptance and higher revenues.”