Visa made good this month on its promise to help merchants fight so-called "friendly fraud," which is when consumers dispute a legitimate purchase. But many smaller online merchants could end up worse off if they're unprepared, experts say.
Friendly fraud incidents rose between 20% and 30% last year across global markets,
Visa's move is likely to short-circuit many consumers' attempts to disavow certain purchases — including the growing number who dispute digital subscriptions, gaming and gambling purchases, said Kevin Lee, vice president of trust and safety at the fraud-detection firm Sift.
Merchants that have been shouldering many of these first-party fraud transactions can now push the liability back to issuers by supplying a customer's IP address; a device ID or fingerprint connecting the consumer to the device conducting the transaction; or a shipping address or account login linking the consumer to the purchase.
"The problem is that we've spoken to many smaller merchants who don't have these tools, and those who aren't prepared will now lose more of these disputes," Lee said, declining to name the specific merchants who are wary of exposing liability loopholes.
Midsize online apparel sellers are one category bristling at Visa's new rules, Lee said, noting that the Merchant Risk Council recently released research suggesting that only 31% of all online merchants currently use device ID as a fraud-detection signal.
The new fraud-liability parameters are likely to
"Visa has raised the bar for everyone, which is going to make consumers take more responsibility in the end," Lee said. "And it will be great for merchants big enough to have their own tools or an acquirer that can provide compelling evidence, because they can automatically push more disputes back to the issuer. But merchants that lack the tools to provide compelling evidence will have no recourse and in some cases they will automatically lose these friendly-fraud disputes."
Mastercard updated its own chargeback guidelines last year, but it has not implemented anything specifically standardizing first-party chargeback rules between issuers and merchants. Visa's rule, which is optional, applies only to card-not-present transactions for online or in-app purchases.
"Merchants I've spoken with indicated that accessing some of the required data elements is not a trivial effort," said Julie Conroy, head of risk insights and advisory at Aite-Novarica.
Smaller merchants also may not be aware of the development, which was publicized through Visa's ongoing streams of information and updates across a wide gamut of topics.
"Unfortunately, smaller merchants can be left out of the loop on these sorts of initiatives and learn of them after they've launched," Conroy said.
It's difficult to pinpoint which types of merchants are likely to be affected by the rule change, but smaller merchants typically lack deep resources to cope with increasingly complex types of fraud, said Doug Kantor, general counsel for the National Association of Convenience Stores, a nonprofit based in Alexandria, Virginia, representing more than 2,100 retailers.
"If this new rule can help protect merchants from some aspects of card fraud, that's great. But it's a small consolation for the bigger fraud burdens merchants carry and many of the unfair practices surrounding how the card networks assign liability for fraud," Kantor said.
Through payment card interchange, merchants are already supposedly covering the cost of fraud and other fees, according to Kantor. "If they aren't equipped to cope with this new rule, some of them may end up paying for the majority of fraud all over again," he said.
Visa is right to help clarify liability for chargebacks attributed to first-party fraud, which has grown out of control in recent years, but it shouldn't cost merchants more to comply with the rules, said Monica Eaton, CEO of Chargebacks 911, which sells chargeback management software to merchants.
"Nearly every consumer had a legitimate reason to file a chargeback during the first part of COVID-19 with businesses closing and merchandise not arriving because of supply-chain problems, and … banks removed a lot of the friction in doing so because they were dealing with so much volume," Eaton said.
But despite the supply chain's recovery, consumers still abuse this system, according to Eaton.
"We're seeing tremendous amounts of friendly fraud in industries that were really not usually driving this, like restaurants and quick-service food outlets, for $14 and $25 here and there," she said. "It's often family members or teenagers who are taking advantage of the ease of canceling a bunch of transactions."
Airlines are also drawing more friendly fraud — and not just for airline tickets but for the fees associated with travel upgrades, baggage check and airport lounges, Eaton said.
"All of these new charges will create more friction and opportunities for friendly fraud for people who may not have realized they're expected to pay an annual fee in addition to a monthly or per-usage fee when accessing travel upgrades," Eaton said.
Merchants that have borne the brunt of many friendly-fraud chargebacks deserve relief, but small merchants shouldn't be on the hook for more liability if they lack deep pockets and resources to support their own compelling evidence to prove consumers actually made purchases they're contesting, she said.
"Somehow, after the pandemic, we've redefined what it means to have difficulty, so many consumers don't hesitate to just click on their bank app to dispute a payment for something they forgot to cancel, and merchants shouldn't have to pay for that," Eaton said.
