Understanding the New Visa Friendly Fraud Rule

Beginning in April 2023, Visa will provide online businesses a new friendly fraud rule, aimed at helping these businesses dispute chargebacks related to friendly fraud. This change creates tremendous potential for companies to prevent losses, but to take full advantage of it, they will also need processes in place. Not to mention, the new tool creates an even more compelling case for a robust fraud prevention strategy.

What Is the New Visa Friendly Fraud Rule?

Referred to as “Compelling Evidence 3.0,” Visa’s new rule is the first of its kind and is designed to give ecommerce businesses more options when presented with a chargeback. The new rule can be used to reverse the transaction fraud status associated with Reason Code 10.4: Other fraud, card-absent environment, when the situation allows.

Currently, when businesses suspect that a chargeback is attributed to non-malicious friendly fraud, they have fairly limited options. This is why these chargebacks are some of the most difficult to dispute. Ecommerce businesses can only use the single transaction, and have to dig into social media accounts to try to prove that a legitimate cardholder made the purchase.

But with the new rule, ecommerce businesses can go beyond just using that one transaction. They can also submit at least two other undisputed transactions processed on the same card within the last 120 days (the general time frame for transaction disputes). Granted, those other transactions do have to be connected in some way to the transaction in question with data points such as IP addresses, device IDs, shipping addresses or even biometric information.

Even more promising is the fact that businesses can submit this data “pre-dispute,” as long as it is provided within seconds of the transaction.

All of this gives Visa’s CE 3.0 the potential to make a dent in the ever-increasing incidences of friendly fraud.

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Why Is Friendly Fraud Such a Problem?

Friendly fraud is one of the toughest fraud types to combat because it’s typically not done maliciously. Usually it involves customers disputing transactions “accidentally” because they don’t keep careful records of their purchasesFriendly fraud can also result from situations such as:

  • The customer forgot they agreed to a recurring payment, such as a software or magazine subscription.
  • Another family member authorized the purchase without the cardholder’s knowledge.
  • The purchaser misunderstood the return or refund policy.
  • The company name on the credit card statement differs from the company the customer made the purchase from, and the customer doesn’t recognize it.

Friendly fraud has been on the rise with online businesses reporting a 28% increase since 2019.

When friendly fraud isn’t friendly

Originally, chargebacks were developed to protect consumers from being responsible for the costs associated with fraud. But some customers have taken advantage of the chargeback process and turned it into a profitable enterprise. They game the system and knowingly commit chargeback fraud by intentionally filing fake chargebacks, with the goal of keeping the goods they ordered and receiving a refund of the full transaction amount.

Chargeback fraud happens when customers:

  • Place an order with the explicit intent to get free products
  • Experience buyer’s remorse and regret a high-priced purchase
  • Hide a purchase from a spouse or joint account holder
  • Try to lower their credit card balance

Chargeback fraud has become so pervasive, the FBI views it as one of the top three largest problems in ecommerce. Chargebacks cost online businesses around $125 billion, and every $100 lost in chargebacks translates to $240 in actual losses.

This is why Visa’s new rule is so exciting.

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Impacts of the New Visa Friendly Fraud Rule

Because the CE 3.0 rule allows businesses to use data attributes such as IP address, device details, and other information, it may cause the more experienced friendly or “first-party” fraudsters to change those data elements, so businesses can’t rely on this rule as a catch-all long term.

However, it should help online businesses improve their overall recovery rate, especially in cases of truly non-malicious friendly fraud.

Another possibility is that the new rule could cause fraudsters to mimic legitimate IP addresses and device details, making the legitimate victim responsible for actual fraud.

Ecommerce businesses need to be prepared

To truly benefit from CE 3.0, businesses need to look at their own processes and prepare to provide the correct data quickly and easily.

A smart best practice would be to store transaction data in an accessible system that can be retrieved within seconds to submit compelling evidence data to Visa’s Order Insight inquiry. Otherwise, businesses can’t take advantage of the CE 3.0 rule and the disputed transaction will be processed as a traditional dispute. Ecommerce companies that don’t have the right transaction processing partnerships in place will struggle to provide data quickly, as it presents quite the technical heavy lift.

Businesses also need to have the fraud analytics in place to distinguish between actual fraud, friendly fraud, and mistaken fraud that can lead to false declines.

[Related Reading] Understanding Credit Card Chargeback Reason Codes

The Best Defense Is Fraud Prevention

At ClearSale, our hybrid solution delivers most comprehensive fraud and chargeback prevention solutions on the market. It starts with an AI-enabled algorithm that leverages trends, intelligence and data gathered from decades of fighting fraud in the most high-risk regions of the world. Using this technology, we can automatically approve most orders quickly.

Suspicious orders are flagged for contextual secondary reviews performed by our more than 2,000 fraud analysts who have the experience to recognize some of the hardest-to-spot fraud patterns. If necessary, our analysts may reach out to customers, but they do so in a way that demonstrates why consumers can trust your business to protect their information.

We then leverage the data gathered from those contextual reviews to help our system better distinguish valid transactions from fraud. That means our system can more easily recognize “good” transactions as we process more for the client, which increases their approval rates and revenue.

This last step in the process helps distinguish friendly fraud. Not only do we offer pre-authorization, but our analysts also encode descriptors to assist in data mining and identifying what a good transaction for the specific client looks like and, inversely, what a “bad” transaction looks like. Once these patterns are identified, they inform how rules are adjusted in the system and aide in better automated processing of orders.

We also offer end-to-end chargeback management.

  • Total Chargeback Protection allows businesses to recoup a portion of losses due to fraudulent transactions.
  • Chargeback Guarantee reimburses the transaction amount plus the chargeback amount for any unauthorized transaction that’s approved.
  • End-to-End Chargeback Management delivers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.

For more information about how your company can prevent chargebacks and identify friendly fraud, reach out to us. ClearSale can help.

Small Business Ecommerce Fraud Protection - How It Works With ClearSale