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How to combat merchant fraud loss: Visa’s Compelling Evidence 3.0

Author: Laura Ballam


All retailers, both physical and digital, are painfully familiar with merchant fraud. Not only does it cause financial losses, it can also damage your reputation within the industry. It's frustrating to bear the burden of chargebacks and associated fees, resulting in reduced profitability and increased operational costs. Increasing merchant fraud also undermines trust in the retail industry, leading to more stringent security measures and increased scrutiny of transactions, creating additional challenges for legitimate businesses. Unfortunately, the burden is always on the merchant - no matter who the issuing bank is – which is why protecting your business from merchant fraud loss is critical. But most merchants are unable to identify their customers to the extent needed, and they can’t stop scams for various reasons.

Some common forms of merchant fraud include:

  1. Chargeback fraud: This occurs when a customer makes a purchase using a credit card and later disputes the charge with their card issuer, claiming the transaction was unauthorized or they didn’t receive the goods or services.
  2. Friendly fraud: Also known as "cyber-shoplifting," friendly fraud is when a customer makes a legitimate purchase but later disputes the charge, either intentionally or due to confusion, resulting in a chargeback.
  3. Refund fraud: Also known as “double-dipping”, this is a form of friendly fraud. A customer legitimately purchases something, but then goes back to bank and says “I didn’t purchase this”. The Customer bank goes to the merchant’s bank and says we’re going to do a chargeback, and sends the money back to the customer, which of course is passed on to the merchant, but that chargeback doesn’t appear for up to 10 days. At the same time, the customer goes to the merchant and gets a refund directly from them as well. So, the merchant loses twice because of the direct chargeback and the bank chargeback.
  4. Identity theft: Fraudsters may steal personal or financial information from legitimate customers or merchants and use it to make unauthorized purchases or conduct fraudulent activities such as submitting false claims that result in chargebacks.

How to prevent merchant fraud

Retailers are increasingly investing in fraud prevention measures, such as advanced fraud detection systems, improved authentication processes, and robust data security protocols, to mitigate the risks associated with merchant fraud. Being able to identify your customers is essential to preventing fraud in the first place, and behavioral biometrics provide an extra layer of identity resolution for fraud prevention.

Collaborative efforts between retailers, payment processors, and financial institutions are also being pursued to share information and combat fraudulent activities effectively. Visa’s Compelling Evidence program, for example, is designed to assist merchants in providing robust evidence when responding to chargebacks, with an aim to improve the efficiency and effectiveness of the dispute resolution process.

Visa Compelling Evidence 3.0 (CE3.0) was introduced on April 15, 2023, and merchants are expected to comply with the new guidelines and adapt their chargeback management processes accordingly. The goal of (CE3.0) is to assist merchants in responding to chargebacks by providing clearer guidelines, expanding documentation options, and promoting collaboration between merchants and issuing banks. The program offers many benefits to merchants and aims to improve the efficiency of the dispute resolution process – always a welcome concept! The specific standard of evidence laid out will reverse or even prevent a chargeback under the card-not-present reason code. It’s also designed to establish a clear relationship between the cardholder and merchant, proving the disputed transaction wasn’t made by an unauthorized third party.  Since Visa estimates that up to 80% of card-not-present chargebacks are fraud disputes, the implications of reducing them are substantial.

Remember, compelling evidence is crucial in winning chargeback disputes. It helps merchants demonstrate that a transaction was legitimate, and the customer received the goods or services they paid for. By providing compelling evidence, merchants can increase their chances of winning a dispute. That’s where CE3.0 focuses. This means establishing the identity of the customer, as well as providing evidence of successful previous transactions using the same payment credentials.

How does Visa’s CE3.0 help merchants respond to chargebacks and disputes?

New Guidelines and Features: CE3.0 introduces updated guidelines and features to enhance the evidence submission process. It provides clearer instructions on what evidence is required and offers new tools and resources to simplify the process for merchants.

Expanded Documentation Options: CE3.0 expands the range of acceptable documentation for evidence submission. It allows merchants to provide a wider variety of documents, including shipping information, delivery confirmation, customer communication, and refund policies.

Collaboration with Issuers: CE3.0 encourages collaboration between merchants and issuing banks. It emphasizes the importance of communication and encourages merchants to reach out to the customer's bank for additional information or to resolve the issue before it escalates to a chargeback.

Enhanced Benefits: CE3.0 provides clearer dispute resolution guidelines, reduces the likelihood of unwarranted chargebacks, and helps merchants recover lost revenue. It also streamlines the evidence submission process and improves the overall efficiency of chargeback management.

How to combat merchant fraud losses with Visa’s compelling evidence guidelines

As the merchant, it’s on you to prove due diligence in protecting customers and preventing fraud. It’s also on you to prove a chargeback is unfounded. If you believe you’ve done everything you can (or everything in the handbook), you can go to your bank and say the liability falls back to the customer’s issuing bank. But then what? The issuing bank goes to the customer, verifies the customer hasn’t done anything to jeopardize their security, e.g. sharing their password, and then comes right back saying nope, sorry – it’s still your problem.

With the improved CE3.0 merchants are better equipped to dispute fake chargebacks. If you, the merchant, can access the customer’s history and show the customer did shop from you two or more times in the past year, you can provide that as evidence they’re a legitimate customer and they’re trying to execute a scam.

To do this, you need the history of the purchase, as much detail as possible (shipping and delivery, communications, etc.), and you must be able to prove that customer has shopped with you before the chargeback was submitted. It's all about knowing your customer to prevent fraud.

The ultimate goal is to provide your compelling evidence in the pre-dispute phase, protecting both your chargeback and fraud rates. To do so, the data must be submitted through the Order Insight system  within two seconds of the request – so timely data is key. You can of course still dispute a chargeback that’s been processed but it’s a longer procedure. Having the right data, i.e., evidence, at your fingertips is the best way to combat merchant fraud using Visa’s Compelling Evidence 3.0.

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