Visa’s decision to get tougher on merchants who struggle with chargebacks brings into stark relief the pain caused by the increasing fraud pressure that online retailers face.
On one side are sophisticated fraud rings getting better at their dark craft by the day and consumers with higher expectations when it comes to the buying experience. On the other are key players in the payment environment demanding better performance in part because fraud is becoming such a significant threat.
All of which means thousands of online merchants are reassessing their relationship with fraud and chargebacks and their strategies for avoiding both before they happen.
First, the coming changes, apparently slated for October, as reported by Digital Transactions last week and previously by others. The changes will affect both Visa’s Chargeback Monitoring Program and its Fraud Monitoring Program.
Most notably, in the chargeback monitoring program, the acceptable limit for dispute-to-transaction ratio will drop to 0.9% from 1%. For high-risk merchants, the rate will move from 2% to 1.8%. The limits for the number of monthly disputed transactions remain the same: 100 per month in many cases and 1,000 a month for high-risk merchants.
The Visa Fraud Monitoring Program’s fraud-to-sales thresholds will change to 0.9% from 1%. The fraudulent sales figure of $75,000 a month that places merchants in the program will remain unchanged. High-risk merchants, those with at least $250,000 a month in fraudulent transactions, will see the acceptable fraud-to-sales ratio drop to 1.8% from 2%.
That’s a lot of numbers, but what it all means is that there are millions of dollars at stake for merchants who fail to get a handle on their fraudulent orders and chargebacks, both from unauthorized use of accounts and from consumer abuse and errors. The monitoring programs come with higher fees, generally borne by merchants.
They also come with a requirement that a merchant devise a plan to reduce its fraud and chargebacks and that the merchant successfully executes on that plan. If the merchant fails, its merchant account is ultimately closed, meaning the merchant can no longer accept Visa. Not good.
It’s hard to overstate the potential disruption that presents itself when Visa makes a significant policy change. It was about a year ago that the card company announced the overhaul of its claims resolution system — one of the most sweeping changes in decades. It was a time for merchants to reconsider their practices and policies.
Naturally, online retailers today will need to step up their game to avoid the headaches that come with exceeding Visa’s new chargeback and fraud limits. For some, the limits have served as a benchmark: As long as chargebacks and fraud were below Visa’s danger zone, their thinking goes, the fraud and chargebacks are acceptable. Some in that club are no doubt living with rates above 0.9% or 1.8%, depending on the category, but below the 1% or 2% in the current rules.
They are no doubt rethinking how aggressively they want to combat fraud and chargebacks now.
Visa cares about the fraud and chargeback hygiene of its customers because having businesses on its platform that appear to engage in risky business practices reflects poorly on Visa’s brand.
Visa’s changes come at a time when retailers are embracing new solutions to battle the old problems of fraud and chargebacks. In fact, innovative companies are changing the way progressive merchants think about the twin demons. Forward-thinking retailers no longer embrace a defensive mind-set when thinking about fraud and chargebacks that result when an order is not received, or it is received, but does not meet a consumer’s expectations, for instance.
Of course retailers need to protect themselves when it comes to fraud and chargebacks. But future-focused retailers see the area as an opportunity to maximize revenue. Fraud and chargebacks and devising ways to avoid and manage them have a direct bearing on customer experience, which in turn has a direct bearing on sales.
In recent years, a growing number of retailers have embraced the guaranteed fraud prevention model to manage fraud at the point of transaction. The guaranteed model uses big data, machine learning and domain expertise to identify fraudulent orders in milliseconds. The model also dramatically reduces the likelihood that a legitimate order will be improperly declined as fraudulent. Should a fraudulent order be approved, the guaranteed model makes the merchant whole for all costs.
But what about non-fraud related chargebacks, the kind that can still land a merchant on the wrong side of Visa’s chargeback ratio threshold? Such chargebacks, including INR (item not received) and SNAD (the received items is “significantly not as described”) and those cases where a consumer doesn’t recognize a charge on their statement, even though they actually made the purchase?
Such chargebacks present retailers with one of their most fraught customer experience scenarios. Do they want to challenge a customer’s claim, essentially accusing them of lying? Or do they want to blindly give in, not bothering to determine whether the claim is legitimate or not?
Neither choice is terribly attractive. Instead, retailers can turn to a sophisticated chargeback management system, like Signifyd’s Chargeback Recovery, which uses the same tools as Signifyd’s Guaranteed Fraud Protection to determine which chargebacks are based on legitimate customer complaints and which are the result of a customer-gone-bad, someone trying to take advantage of a retailer.
The system relies on sophisticated innovation. It also relies on human intelligence, experience and intuition to focus on improvements in practices and policies that will help retailers avoid chargebacks in the first place. For instance, a clear and logical return policy can go a long way toward eliminating consumers’ temptation to file a chargeback rather than jump through hoops to return a product that didn’t work out for the consumer, for whatever reason.
When you look at Visa’s changes that way, you might even begin to think Visa’s tougher standards are doing merchants a favor — at least when it comes to adding to the motivation to give consumers the kind of buying experience they want.