What you don’t know can, indeed, hurt you — especially when it comes to chargeback liability. The waters of transaction disputes are challenging even today, but as of April 15, 2018, things will get a little more challenging, at least for a while.
That’s the date that Visa’s new rules on chargebacks will take effect.
Visa’s goal in driving these changes is to resolve chargebacks (henceforth known as “disputes”) more efficiently by standardizing the way in which disputes are presented and the timeframes that govern the process.
The rising cost of chargebacks and lack of a standardized process for addressing this growing problem led Visa to revisit its approach to managing disputes. The new global dispute resolution — Visa Claims Resolution, or VCR — aims to simplify the process from a litigation-based model to a liability assignment model based on solid data surrounding the claim. VCR rolled out in Hong Kong and New Zealand in October 2017.
The April 15 rollout will be on a global scale and will impact all payment industry stakeholders: merchants, issuers, acquirers and processors.
In a recent digital discussion with PYMNTS.com, Julie Fergerson and Mike Pullen (SVP Industry Solutions and Representments Specialist, respectively, at Ethoca) described the Visa rule change as having three main objectives.
The global rule change is intended to standardize how disputes are presented and, therefore, how (and if) they will be accepted. This is to protect the integrity of the ecosystem and to reduce the number of disputes being processed by Visa’s clients.
The second and third goals are to encourage automation and to streamline existing workflows. Consolidating chargeback reason codes from 22 into four buckets will serve both objectives by dramatically reducing the complexity of the current process.
Furthermore, allocation and collaboration within those buckets will reduce back-and-forth communication between merchants, issuers, acquirers and, in situations where the end customer initiated the dispute, consumers.
There’s a lot to unpack with the upcoming shift, and these stakeholders will want to make sure they’re on top of their game. What will it mean for issuers and acquirers in a practical sense? What are some common concerns and best practices leading up to the liability shift? Is the ecosystem ready for this?
These are the topics that Fergerson and Pullen grappled with during the discussion. The full replay, with slides, can be found here. The CliffsNotes, if you will, are below:
Key Changes: 5 Things You Need to Know
The Ethoca experts agreed that the following five points were key takeaways from the webinar.
First, the shift is coming on April 15, whether the ecosystem is ready or not, and that date is unlikely to move. Luckily, both Fergerson and Pullen felt that issuers and acquirers had been doing all the necessary testing to brace for the change.
Of course, there’s only so much one can do, and any major change is bound to rock the boat. Expect nothing less from this change, Pullen and Fergerson said. But also take heart from the fact that the new system is fully operational in Hong Kong after its soft launch in the fall. Time should produce the same results in the rest of the world, said Fergerson and Pullen.
Second, chargeback reason code 75, for “Transaction Not Recognized,” is going away. Today, it’s one of the most widely used codes, but Pullen said that’s because agents often slap it on disputes that defy easy categorization. With fewer (and more clearly delineated) buckets, he said, this code will no longer be needed — and requiring a more specific reason for the dispute up front will save processing time further down the line.
There is a “but.” The transactions most typically coded that way will now find their way into the fraud bucket, inflating fraud ratio numbers as a result. The key takeaway here is to take every measure to avoid disputes in the first place by communicating with customers clearly before issues arise.
That means using clear payment descriptors for statements, dealing with customer service issues promptly, activating Verified by Visa security checks, such as AVS and CVV2, and issuing timely refunds where warranted.
Third, chargeback reason codes are shifting format. The four reason categories in the new system will be fraud, authorization, processing error and consumer dispute. The reason codes with which merchants, issuers and acquirers are familiar today will fall under one of those categories.
Fergerson explained that many merchants will use these new codes to train their fraud modules as well as for internal reporting and other automated processes. The shift will allow Visa to build its rules engine around the four categories instead of the current 22.
However, it will introduce a challenge for merchants whose acquirers make the change, as the merchants must also change the codes within their system in order to keep automated processes running as they should through the shift.
Fourth, dispute windows for merchants are being cut by one-third — and that’s only the beginning.
Today, merchants have 45 days to respond initially when a dispute is filed. Resolution can take up to 150 days to complete. After the shift, the initial response must come within 30 days, and resolution must be complete within 31 to 70 days for fraud and authorization disputes, or 31 to 100 days for processing errors and customer disputes. Next year, that 30-day window will be further shortened to 20.
Fifth, there is a new magic number for issuers when it comes to eCommerce transaction chargebacks. After the shift, issuers may dispute a maximum of 35 eCommerce transactions within a 120-day period on confirmed fraudulent accounts. If the limit is reached, Visa will block any further disputes from that account.
Allocation and Collaboration
In the new system, all fraud and authorization disputes will go through the allocation workflow. Ethoca anticipates a 13 to 15 percent reduction in valid disputes as a result.
Liability shifts back onto the issuer if the transaction was 3D Secure authorized or already refunded, if the dispute came in after the first fraud reported date (when the issuer should have closed the fraudulent account) or if the dispute was received beyond the allotted timeframe for reporting.
In any of these cases, the dispute will not be allowed to occur, and no fees will be assessed to the merchant. Otherwise, liability shifts onto the merchant.
Furthermore, in the new allocation workflow, the merchant must present a compelling evidence package up front, inclusive of all relevant information. Further information cannot be added later. There is one chance to make the case, and then Visa will make the final decision about liability.
The dispute categories of processing error and consumer dispute — that is, disputes that revolve around customer experience, such as merchandise not being received or not arriving as described — will be processed through the collaboration workflow.
This requires true collaboration and continued interaction between parties to make a determination. Merchant documentation and compelling evidence are again critical. Once a decision is reached, the issuer either challenges the customer by presenting data as evidence or accepts liability, which can mean re-billing the cardholder or choosing to write off the transaction.
Pullen advises very strong KYC (Know Your Customer) practices because of this. Strong verification systems at the front end can help validate transactions and collect key data for challenging disputes if and when they arise.
Best Practices and Tips
The number one piece of advice that Pullen and Fergerson offered was to embrace automation. As processing time shrinks, pulling together the necessary information via manual efforts simply won’t be practical — or even possible, in some cases. Partners like Ethoca could play a big role in helping to get those automated processes in place.
As for the nitty gritty, Pullen and Fergerson urged issuers and merchants to talk to their acquirers about things like processing time, the potential discontinuation of provisional credits, best practices for educating everyone in the company and other details that will vary by company — but which, they said, are just as important as wrapping one’s head around the liability shift as a whole.
To watch the full webinar please click here.
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