Online merchants will face the most sweeping changes the credit card network has seen in a quarter century next month when Visa overhauls its claims resolution system.
And while the changes to chargeback-resolution rules announced months ago by Visa are aimed at simplifying a complex system, it most likely will make life more difficult for thousands of online merchants who accept credit card payments online — certainly in the early going.
That said, Visa’s initiative, dubbed the Visa Claims Resolution program, will not change the service Signifyd provides to the more than 5,000 merchants who rely on the company’s guaranteed fraud protection. Nor will it change Signifyd’s relationship with them. Put simply, Signifyd will continue to provide a 100 percent financial guaranteed for all approved orders that ultimately turn out to be fraudulent.
No question there is plenty at stake with $33 billion expected to be lost to chargebacks annually by 2021, according to The Nilson Report. With that in mind, here’s a closer look at some of Visa’s changes and what they mean for merchants.
All new chargeback codes are coming
First comes the total overhaul of the chargeback codes that Visa uses to provide the reason a chargeback is filed in the first place. The change, effective when the program kicks off on April 15, reduces from 22 to four the number of codes in Visa’s system. While the reduction in number appears dramatic, in truth, each of the four categories has subcategories, making for 24 total labels.
The bigger issue for merchants, especially those who use the current codes to build fraud prevention models or write fraud rules, is that the old Visa labels will no longer be relevant once disputes are filed under the new system.
Also significant is the fact that a heavily used reason code, 75 — transaction not recognized — will disappear entirely. Issuing banks have used the code liberally, generally when a cardholder reports that he or she doesn’t recognize a charge. In some cases that is due to forgetfulness. In others, it’s because the payee listed on a credit-card statement is different from the actual brand name that the customer had contact with. And sometimes, it’s because the order was fraudulent.
Those chargebacks most likely will be filed under one of the new fraud reason codes — a subset of reason code 10 under the new system.
Multiple changes coming for the chargeback resolution process
The new Visa program also comes with shorter timelines, higher fees and tighter rules about appealing decisions on ecommerce orders that consumers and their credit-card issuers deem fraudulent or otherwise unsatisfactory. Under the new Visa Claims Resolution rules, which apply only to Visa transactions, merchants will have 30 days, instead of 45 days, to respond to a dispute involving a charge.
Because the dispute flows through a number of entities in the payment chain, a merchant will actually have far fewer than 30 days to prepare its case against the chargeback.
“Before the merchant even receives the chargeback, it goes through the card brand; it goes through the acquiring bank; it goes through the gateway and then, ultimately, the merchant, so there are several days that have already passed,” says Janice McNally, Signifyd’s senior manager of chargeback and claims. “With the complexity of chargebacks, there is less time to dispute it; less time to investigate; less time to collect all their evidence to fight those chargebacks.”
The new rules also change the dispute process for cases that fall into Visa’s fraud category (chargebacks due to fraud) and authorization category (authorization not obtained or denied).
In those cases, the new rules will also eliminate the opportunity for the issuing bank to file for pre-arbitration a second time if its initial pre-arbitration filing isn’t successful. The change is good news and bad news for merchants. It prevents the cardholder and issuer from getting a second bite at the chargeback apple, but it could also lead to more frequent full-blown arbitration cases.
Beginning next month, if an issuing bank wants to appeal an unfavorable pre-arbitration ruling, rather than file for pre-arbitration a second time, it can go straight to arbitration, a process that can cost the losing party $500 to $750.
Depending on the value of the order in dispute, it simply might not be worth it for a merchant to continue to fight a chargeback, even if he or she believes it is unwarranted.
Quicker rejection of chargebacks might help merchants
Merchants might come out ahead on a change that will more reliably and more quickly spot chargebacks that are invalid on their face. Consumers have 120 days to dispute a credit-card charge. Today, chargebacks filed beyond that timeline often aren’t caught until the chargeback process is underway. Visa says it is turning to an automated system with the intelligence to spot and reject those chargebacks immediately.
The automatic rejection will also be applied in two other scenarios: disputes in which the merchant has already provided a refund and for transactions that were protected by Visa’s 3D Secure.
All-in-all, the changes will require merchants to rethink some of their operations and reinforce some of their best practices. In particular, experts have suggested that merchants:
Avoid chargebacks in the first place: A significant number of chargebacks stemming from consumer disputes can be avoided with clear communication. Start by clearly stating your return policy and procedures on your website. And make returns relatively easy. You’ll reduce the temptation on consumers’ part to skip the return hassle and instead get their money back through their credit card company.
Continue to keep the lines of communication open after the sale. Hear your customers out when they say the product is not what they expected or that it is defective. Perhaps an exchange or refund is in order, either of which will cost you less than a successful chargeback.
When it comes to chargebacks due to fraud, team up with a high-quality fraud protection partner that provides guaranteed fraud protection. Signifyd uses big data and machine learning to instantaneously sift fraudulent orders from legitimate ones and makes merchants financially whole for approved orders that later turn out to be fraudulent.
Be prepared for the chargebacks that you don’t avoid: Given the shorter timeframe for dispute resolution, you want to make sure you have easy and instant access to the convincing evidence you will use to make your case. Be sure you have systems in place to rapidly respond with sufficient, but not too much, information to show that a chargeback is unwarranted.
Turn to automation: Identify those areas in your order and fraud management systems that can be automated. Turning to machines will allow you to respond more quickly and more effectively, while freeing you and your staff up to focus on other mission-critical jobs.
Visa has said the changes in its claims-resolution procedures are needed to speed up the chargeback process. In particular, Visa says that disputes currently take an average of about 46 days to be resolved. Under the new rules, the card company says most disputes will be resolved within 31 days. Others have said the most complicated cases could take up to 100 days under the new system, down from from roughly 150 days today.
Living with uncertainty for a shorter period of time is a good thing for merchants, but it’s apparent that a lot is going to change in order to get there. New chargeback categories, new terminology, new rules of engagement.
It should bring some consolation, then, that one thing that is not changing is the way Signifyd’s guaranteed fraud protection shifts the liability for and the worry over fraud from merchants to Signifyd.
Contact Mike Cassidy at email@example.com; follow him on Twitter at @mikecassidy.