Visa recently announced that starting April of 2020, "the Visa Rules will be updated to ensure issuers, acquirers and their sponsored merchants control first-party fraud. First-party fraud is a concern for all parties in the payment ecosystem. This occurs when a cardholder seeks reimbursement or a credit for legitimately purchased goods and services, resulting in potential disputes and creating additional costs for all participants." So, what is first-party fraud? Here is what merchants need to know.
First-party fraud can be split into two categories: chargeback fraud and friendly fraud. Let's break down each of those categories.
Chargeback fraud is when a cardholder maliciously disputes a charge in an attempt to get their money back from the transaction, while still retaining the goods or services they received. Chargeback fraud is considered first-party fraud because everything went right with the transaction, but the cardholder is taking advantage of the dispute process. A cardholder may commit chargeback fraud for a variety of reasons. This type of fraud can stem from buyer remorse, poor budgeting, to sell the product on eBay or Craigslist, among other reasons.
Friendly fraud is when a cardholder mistakenly disputes a charge. This type of invalid dispute can come from an unclear merchant descriptor, a family member making unknown purchases, or simple forgetfulness. Even though friendly fraudsters are not disputing the charge out of malicious intent, they still cost merchants in chargeback fees, labor costs, and the possible loss of merchandise and transaction amount.
How Visa is Already taking Steps to Prevent First-Party Fraud
Visa Merchant Purchase Inquiry (VMPI) was developed by Visa after "[They] saw over 2.6 million chargebacks initiated [in 2015] because cardholders did not recognize the transactions, an increase of over 13% from the prior year. In addition, 20% of all chargebacks were tied to purchases of digital goods, which includes electronic downloads of movies, music, and phone application purchases. As the number of transactions related to digital goods continues to increase, so does the potential for an increased number of disputes. And this can be expensive, as the cost of working a dispute can be far greater than the purchase itself. Merchants and issuers need a more proactive way to prevent a dispute from occurring if a cardholder does not recognize the transaction. While digital goods merchants are certainly important due to the volume, use cases exist for ALL merchants looking to reduce dispute volume, including brick and mortar merchants, travel and entertainment, and online merchants." VMPI gives merchants the ability to provide detailed company, customer, order, and product information to card issuers on-demand. Ultimately, VMPI empowers representatives at your customer's financial institution to stop invalid disputes from being filed against you.
How Does VMPI Prevent First-Party Fraud
With VMPI, the dispute analyst can use transaction details to decide if the dispute is invalid and prevent it from being filed. In cases of friendly fraud, the additional data helps jog the cardholder's memory about the purchase. Friendly fraudsters just need a reminder or help to connect the dots of a purchase they don't recognize. The additional data provided to the issuing bank's representative can help confused cardholders remember what was purchased.
In cases of chargeback fraud where the cardholder is trying to intentionally misuse their chargeback rights, the extra layer of confirmation acts as a critical deterrent from proceeding with the dispute.
If you are interested in learning more about the benefits of VMPI or how to get set up with a VMPI facilitator, you can click here.
More Protection to Come?
The announcement that Visa's rules will be updated to help merchants control first-party fraud is a great sign for merchants. This announcement tells us that Visa is working to bring even more clarity and communication to the dispute process.