Visa’s™ Compelling Evidence 3.0: A Challenge That Creates Opportunity

It’s no surprise that the pandemic-fueled surge in online shopping has led to an increase in credit card fraud of all kinds — including first-party misuse, or friendly fraud.

When a customer disputes a legitimate transaction, whether it’s a knowingly fraudulent refund claim (e.g., making an online purchase and then falsely claiming that the product never arrived) or simply the result of confusion (e.g., contesting the automatic renewal of a long-forgotten subscription), a chargeback to the merchant is the inevitable result.

The Rising Cost of Chargebacks

Chargebacks are a growing problem for retailers. Merchant Fraud Journal projects that retailers will pay more than $100 billion in chargebacks in 2023. And, of course, the chargeback itself isn’t the only cost the merchant incurs. According to a recent study by Justt, for every $100 a merchant loses in chargebacks, the actual cost is estimated to be $240. This is due to all the associated expenses — from chargeback fees, to shipping expenses and processing fees, to customer acquisition and reputational costs.

Visa’s recently introduced dispute-program update, Compelling Evidence 3.0 (CE3.0), aims to reduce the volume and cost of friendly fraud investigations across the payment ecosystem. But although CE3.0 brings more clarity to the process and may expedite dispute resolution, the new rules are stringent and don’t necessarily match consumer shopping behaviors. In fact, the rules pose several challenges for retailers wishing to dispute chargeback transactions to receive liability protection from the card issuer.

New Rules Governing Chargeback Disputes

To successfully dispute a chargeback under CE3.0, a retailer must establish a historical relationship between the shopper and the card used in the contested transaction, thus providing some assurance that the transaction was made by the cardholder and not an unauthorized party.

Merchants can establish this link by supplying records of two previous transactions that meet both of the following criteria:

• The transactions must have used the same payment card as the disputed transaction, be more than 120 days old, and never have been disputed or flagged as fraudulent.
• The previous transactions must have at least two core transaction data elements that match those of the disputed transaction. One must be either IP address or device ID, and the other may be customer account ID or shipping address.

A Dual Strategy to Fight Friendly Fraud Chargebacks

To protect themselves from losses that should be the responsibility of the card issuer, retailers should therefore make sure they're tracking and storing (for a sufficient period of time) the necessary data points. This will likely mean a significant push toward encouraging account creation by new shoppers. Taking this step helps to ensure that consumers start building a transaction history, and adopting a fraud prevention strategy that incorporates a robust device-proofing component that captures the required IP address and device ID transaction data elements.

While CE3.0 does create some challenges for merchants, the new rules also represent an opportunity as the solutions to these challenges bring additional benefits that can be expected to pay significant dividends over time. Encouraging shoppers to create accounts rather than making purchases as guests will give retailers better marketing insights and enable them to improve engagement with returning customers. Account creation also supports risk reduction, and protecting account creation and checkout with device proofing — an approach that provides key insights into device history, device reputation, device-to-identity linkages and user behavior — can help merchants flag risky users and behavior without creating unnecessary friction for good customers.

In short, implementing effective strategies to meet the CE3.0 criteria and fight friendly fraud will also boost retailers’ overall fraud prevention efforts while promoting a more positive, engaging, friction-right customer experience.

Christina Petersen is the retail fraud lead for TransUnion, working with industry leaders to understand and shape fraud, authentication, and identity verification trends within the retail and e-commerce space.