Chargebacks have long been a thorny issue for merchants. And as transactions become increasingly digitized, chargebacks have in turn become more prevalent.
They not only represent a loss of revenue but can also incur additional fees and damage relationships with payment processors. The rise of eCommerce has seen an uptick in chargebacks, making it crucial for merchants to possess effective tools for their prevention and management.
That’s why network-led initiatives, like Visa’s Compelling Evidence 3.0 framework, are so important for offering merchants a standardized approach to defend against post-transaction fraud disputes and prevent chargebacks.
“Being able to handle chargebacks preventatively has a huge ROI [return on investment],” Robert Painter, director of chargeback management at Kount, an Equifax company, told PYMNTS.
“It means no chargeback, no refund, and no case to go down and chase,” Painter said, noting that Visa’s framework offers clear guidelines and enhanced mechanisms for merchants to assert their stance against illegitimate chargeback claims.
One of the standout features of Compelling Evidence 3.0 is its clearer, more detailed specifications of what constitutes acceptable evidence in disputes over digital transactions.
Since the framework took effect in April 2023, compelling evidence must now consist of the customer’s device IP address or device ID; two primary pieces of this evidence (device fingerprint, IP address and account/login ID or delivery address) must correspond with previously undisputed transactions; and two or more previously uncontested or nonfraudulent transactions within 120 days of the transaction under dispute.
Recognizing the unique challenges of digital commerce, Painter explained that the framework has tailored these guidelines to specifically address the nuances of online transactions. This includes scenarios where the customer disputes a transaction based on the assertion that the product or service was not as described or that the transaction was not authorized.
“Being able to be in a scenario where you can provide data in an automated fashion is big. What we’re seeing on our side, with the merchants and providers we work with, is that a 60% to 80% deflection rate is definitely obtainable,” he said. “The process of shifting from being reactive when it comes to disputes to being preventative, that’s a big difference.”
Still, just as omnichannel commerce has given rise to new attack vectors of transaction disputes and chargeback opportunity areas, it has also created new awareness around areas where preventive measures are needed to prevent chargebacks, and areas where there are better answers and tactics.
“The big takeaway when we talk about data, is that it allows us to know when certain measures make sense. Certain merchants in certain verticals, it can be phenomenal. Being mindful of the application is a big benefit of leveraging historical data,” Painter said.
Chargeback misuse, also called friendly fraud, first-party misuse or first-party fraud, accounts for up to 75% of all chargebacks. And it works because typically the payment network, and not the consumer, shoulders the brunt of the transaction liability.
“Liability shift is the coolest thing that you’ll hear when we talk about compelling evidence,” said Painter, noting that because chargeback, as an instrument, is meant for consumer protection, it’s natural for banks and credit card companies to side with cardholders rather than merchants at chargeback mediation.
But providing compelling evidence that shows the cardholder actively participated in the transaction, received goods or services or derived some form of benefit from the transaction helps merchants gain trust from banks when a cardholder files a chargeback.
Another pivotal component of the Compelling Evidence 3.0 framework is its emphasis on digital transaction records. Painter acknowledged the imperativeness of digital receipts, IP logs and device identification data in constructing a concrete defense against fraudulent chargeback claims. This focus underscores the evolving nature of commerce, where digital footprints often provide the most compelling evidence of legitimate transactions.
At a high level, Painter said, the ability to put up a stronger defense against illegitimate chargebacks can result in improved operational efficiencies for merchants, reduced financial losses and better relationships with payment processors and customers.
Meanwhile, consumers can benefit from a more secure and trustworthy transaction environment, minimizing the chances of fraudulent activities and enhancing their overall shopping experience.
Looking ahead, Painter expressed optimism about the future of the payments ecosystem.
“I think the one thing that always comes to mind when we talk about the ecosystem is that nobody in the ecosystem really wants to have these disputes,” he said. “So, this cooperation and these tools that connect between merchant and issuer and acquirer, it provides a good opportunity for us to all get to a solution.”
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