Forgotten or fraud? Visa rule change blurs the line
When an unexplained charge shows up on a credit card statement, there’s always a chance that a thief is to blame. There’s also a chance that it's a perfectly valid charge the cardholder forgot about — but with new Visa rules, those charges could register as fraud if merchants aren’t careful.
Under its new chargeback rules, which took effect in April, Visa retired one of the chargeback codes that merchants almost always lost — “transaction not recognized” (or “cardholder does not recognize”), formerly listed as Chargeback Reason Code 75.
“Most of the issuers treated that as non-fraud, even though a cardholder would call and say, ‘I don’t know what this is. It wasn’t me,' " said Mark Standfield, president of Midigator, a technology platform that mitigates fraud and chargebacks.
“Since 75 has been retired, the belief is that most of those are going to go into the fraud bucket,” Standfield said.
Under the old rules, the bank could then choose to code the chargeback as fraud, or under the “cardholder does not recognize” category, which the bank previously treated as non-fraud.
“Sometimes it’s as simple as the person gave their kid a credit card to buy something,” said Dinah Suppes, vice president of the Midwest Acquirers Association and vice president of operations for eVance Inc. “The kid went online and bought something, and the parent doesn’t remember it. And they say, ‘Well, I’m going to have to dispute it.’ That goes away now.”
Visa introduced its Visa Claims Resolution initiative, which eliminates the “transaction not recognized” code, to improve the efficiency of handling disputes, according to Visa materials. With the number of disputes rising, Visa chose to automate and simplify the dispute-resolution process to reduce processing time and costs. The initiative also aims to identify and block disputes Visa deems invalid.
But there are some caveats.
Under the rules, fraud and authorization disputes that pass through the automated dispute cycle without incident are considered the merchant’s liability. Merchants and acquirers may only respond under certain conditions, which include instances when compelling evidence is present, the dispute is invalid, a credit has been issued, or a cardholder drops the dispute.
Suppes said ultimately the new rules should help merchants, but they will need to be vigilant about providing documentation that proves a transaction was not fraud.
“Depending on the merchant and how they respond, and the documentation they have to respond with, it could actually increase their fraud numbers,” Suppes said.
That could affect both merchants’ and acquirers’ portfolios. If the number of fraud chargebacks increases, merchants could end up on the card brand reports, and acquirers could run into issues with their sponsor banks.
The change also means that issuers now have to help consumers recognize the transactions.
Visa updated its previous 22 reason codes and replaced them with 24 dispute conditions that fall under one of four categories: fraud, authorization, processing errors, and consumer disputes.
Merchants who want to reject a chargeback need to submit “compelling” evidence — defined as proof of product delivery, emails between the merchant and the cardholder, and any legally binding contracts that the cardholder signed.
The downside is that the merchant won’t be aware of some of the changes and categories. “Some things they thought were an automatic win might not be an automatic win anymore,” Suppes said.
The rules have also reduced the time frame for merchants to respond, to 30 days from 45 days. If they don’t respond in time, it becomes a chargeback they can’t fight, Suppes said.
“That’s kind of huge,” she said. “We’re all going to have to do a better job educating merchants on these changes.”
Visa is also getting more involved in the chargeback process, which Suppes said will be good news for merchants. Previously, the card issuing bank would just bounce a chargeback dispute over to the processor, and it would ultimately fall back to the acquirer and merchant.
“They’re not just going to let an issuer say, ‘I don’t like this paperwork. I don’t think it’s right,’ ” Suppes said. “They’re going to look at it, too, and say, ‘Hey, you’ve got everything you needed. This is fine. You cannot go any further with this.’ That will help merchants,” Suppes said.
Given that the rules are still relatively new, many merchants are still in the dark about the changes. Some merchants outsource their resolution tasks to firms like Midigator.
One change Midigator’s merchants have made has been to implement Address Verification Service AVS, 3D Secure authentication or Card Security Code Verification (CVV) to fight chargebacks. That gives merchants a greater chance of having the liability assigned back to the issuer, Standfield said.
One of Standfield’s merchant clients, a health and beauty products seller with a card-not-present business, started using 3D Secure to win more fraud chargebacks.
“If the merchant doesn’t do AVS, CVV or 3D Secure, then it’s almost an automatic loss,” Standfield said. “Or the liability is automatically assigned to the merchant.”
Standfield predicts that overall, the changes will benefit merchants because the time frames have been reduced across the board.
“This change, in our opinion, is probably one of the best changes that’s happened in a while for merchants because the time frames did not get reduced just for merchants; it’s reduced for issuers and acquirers as well, and cardholders,” Standfield said.