When you think about a disputed card charge, most people’s minds go directly to identity theft and criminal scams. But most chargebacks don’t fit into that category. Rather, they are what has come to be known as first-party misuse, or “friendly fraud.”
Friendly fraud occurs when a cardholder inadvertently reports a legitimate transaction as fraud. This could be a long-forgotten recurring subscription or that a child abused their access to a parent’s card. The common denominator is that even though these charges are disputed by the customer, they are not unauthorized. But first-party misuse can make up as much as 75% of all chargebacks. When the pandemic made more people reliant on digital transactions, payment fraud expanded. And as more and more business is conducted digitally, friendly fraud is poised to increase—it is the second-most-common type of fraud impacting merchants, behind only phishing attacks. Friendly fraud costs businesses inventory and revenue and leaves them subject to chargeback fees. That’s on top of the cost and time spent responding to the false claim.
Taking On the Fight
What can merchants do to combat this type of fraud? One approach was outlined by Visa, which has been refining its dispute program to make it easier for merchants to fight friendly fraud.
The key is to give merchants more ways to show that a disputed charge is valid and authorized. The new rules are designed to protect legitimate cardholder activity while helping business owners keep money that is rightfully theirs.
The program allows merchants to demonstrate that a purchase is legitimate by providing records of two previous undisputed transactions using the same payment credentials. Examples that can help establish that legitimacy include a customer using the same payment credential previously at the merchant, repeated use of a login or IP credentials, or proof of use of a product. Small businesses could avert more than $1 billion in losses globally over the next five years using the Visa plan.
Merchants used to be able to handle these disagreements on their own. Previously, when consumers wanted to return an item, they had to take it back to the merchant and make their case. Nowadays, with so many transactions conducted online, they can anonymously deal with their issuer instead.
“This liability shift relieves merchants to some degree and puts more onus on issuing banks, which means both have incentive to shore up authentication mechanisms to verify the authenticity of transactions and their accountholders,” said Tracy Kitten, Director of Fraud & Security at Javelin Strategy & Research. “We know that first-party fraud detection is a growing challenge for not just retailers but also banks, as scams linked to P2P payments make first-party fraud even more challenging to discern.”
A Team Effort
Visa developed the dispute program in partnership with two of its industry partners, the nonprofit Merchant Risk Council (MRC) and the payment-focused Merchant Advisory Group (MAG). “Reducing the impacts of first-party misuse on small businesses requires industry-wide support,” said Julie Fergerson, CEO of the MRC. “We stand with Visa in their commitment to ensuring the entire ecosystem is taking the right steps against inaccurate chargeback disputes and protecting merchants from bearing the weight of these costs.”
Over the past five years, Visa has spent more than $10 billion to improve its technology, including to reduce fraud and improve network security. The company also employs more than a thousand dedicated specialists monitoring payments activity around the clock. In a single year, Visa proactively blocked $40 billion in attempted fraudulent payments.
Helping merchants to safeguard against these risks while ensuring seamless digital payments has never been more crucial. With its enhanced protocol for fighting first-party fraud, Visa is further positioned to help merchants retain what is theirs—by working together.
