15 Kwiecień 2019

New Chargeback Thresholds – Don’t Panic. Get Ready.

Zobacz wszystkie wpisy

As of October 1st, 2019, Visa, the world’s largest card organisation, is updating its fraud and chargeback monitoring policy. Will it affect you? If you accept cards online – it certainly will. Should you be concerned? Not necessarily, if you have a well-thought risk management strategy, a slight refinement of it should get the job done. If, however, you do not yet have any fraud prevention mechanisms on board, you better hurry up in getting some.

straal Chargebacks-blogpost

Visa, the world’s largest card organisation serving more than 323 million cardholders on all continents, is updating its fraud and chargeback monitoring policy. The changes will be effective as of October 1st, 2019, and may deeply affect some online merchants, especially those operating in high-risk industries, such as travel, online video games, betting/gambling, pharmaceuticals, dating or adult entertainment. Nonetheless, new rules might affect any merchant accepting Visa cards. This short entry is meant to help you understand the current state of fraud and chargeback monitoring, the nature of policy changes and, more importantly, how to effectively prepare your business for the new thresholds by implementing a viable risk management strategy that will help in fulfilling the requirements.

What are frauds and chargebacks?

Payment fraud is any unauthorised card transaction, carried out in whatever channel. Card-present fraud, the offline type, usually occurs at retail outlets and ATMs. However, it is the online one that we will focus on in this post. Europol defines card-not-present fraud as unauthorised use of credit or debit data (the card number, billing address, security code and expiry date) to purchase products and services in a non-face-to-face setting, such as via e-commerce websites or over the telephone. In the majority of cases, the victims are unaware of the unauthorised use of their cards, which remain in their possession. It is a low-risk, high-profit criminal activity. That is until the customer realises that they have been robbed. At this point, every fraud victim is entitled to file for a chargeback.

Chargeback is the return of funds to a customer, initiated by the issuing bank of the instrument. Specifically, it is the reversal of a prior unauthorised (fraudulent) outbound transfer of funds from a consumer's bank account, a line of credit, or credit card. Apart from the reimbursed amount, chargebacks involve additional fees and may lead to merchant account closure. Chargebacks are designed to improve the customer experience by building trust in online card payments.

All card organisations have instruments in place to oversee and record merchants who receive excessive amounts of fraud or chargeback disputes. In case of Visa, these monitoring bodies are VFMP (Visa Fraud Monitoring Program) and (VCMP) (Visa Chargeback Monitoring Program). Each merchant is under scrutiny and each fraud case/chargeback dispute is being held in their database to effectively create a merchant score. The programs are designed to address the increasing problem of online fraud and prevent customers from distrusting online payment systems.

What is the current state of chargeback monitoring? How will it change?

Both VFMP and VCMP have monthly compliance thresholds set up for merchants to monitor businesses experiencing excessive fraud attacks. As Hubert Rachwalski, CEO of a leading online fraud detection provider Nethone points out, if the merchant gets listed on MATCH (Member Alert to Control High-Risk Merchants), it is basically impossible for them to open an account with a new PSP as long as they are on the list. MATCH’ed or not - merchants who are monitored for frauds and chargebacks might face higher fees and less flexibility. While it is a headache for companies of all sizes, for the smaller ones it can quickly imply problems with the liquidity of their resources.

At the moment, VFMP’s standard thresholds for listing merchant accounts on MATCH are satisfied, when the seller exceeds both of the values below for several consecutive months:

  • USD 75 000 fraud amount;
  • 1% fraud-dollar-to-sales-dollar ratio.

With VCMP, the standard thresholds focus on the number of chargeback disputes, rather than the amount of fraud. Again, listing on MATCH is enforceable once the seller exceeds both of the values below for several consecutive months:

  • 100 chargeback dispute count;
  • 1% ratio of disputes-to-sales-transaction count.

As of October 2019, new, tighter thresholds will result in adjustments in the above-mentioned ratios.

New VFMP Standard threshold:

  • USD 75 000 fraud amount;
  • 0.9% fraud-dollar-to-sales-dollar ratio.

New VCMP Standard threshold:

  • 100 chargeback dispute count;
  • 0.9% ratio of disputes-to-sales-transaction count.

Standard VFMP and VCMP thresholds are not the only ones being tightened. In fact, all Visa thresholds are changing, for instance the VFMP Early Warning (from 0.75% fraud-to-sales-dollar to 0.65%), VCMP Excessive (from 2% disputes-to-sales-transactions to 1.8%) and, most notably, Visa Acquirer Monitoring Program threshold - a similar instrument designed to monitor acquiring banks (from 1% sales-to-chargeback ratio to 0.75%). The latter means that acquirers will be more cautious in onboarding high-risk merchants, in fear of approaching the new tighter threshold.

What are the implications of the new anti-fraud policy?

0.1% doesn’t seem like a lot, does it? However, some industries, particularly the high-risk sectors, such as adult goods, online gaming, gambling, online pharmacies, e-cigarettes and a plethora of travel services, will be deeply affected by this seemingly insignificant 0.1%. But it is no longer only about the high-risk businesses - along with the rapid growth of ecommerce worldwide, the tightening of fraud thresholds may instigate fear across a wide variety of industries. We asked Nethone to explain the implications of the new Visa policy:

“Merchants with fully implemented chargeback mitigation strategies are not in the first line of danger - however, they might be under closer scrutiny. Merchants who are currently dangerously close to 1% threshold, after the changes, will fall into chargeback monitoring programmes with a danger of being listed on MATCH.” - says Hubert - “They will be primarily hit by much higher fees imposed by third-party processors. The tightened threshold will increase the number of penalties for merchants who unsuccessfully set their risk management strategies. Soon, the stricter Visa rules will be followed by cautious acquirers who will introduce their own requirement - letting go some of merchants that do not comply with the new policies.”

Merchants exceeding the threshold consecutively for several months are flagged as non-compliant on the MATCH list. This can trigger a Non-Compliance Assessment, linked to a fine. Depending on the threshold exceeded and non-compliance severity, merchants may be forced to pay fees ranging from $50 per chargeback, and up to $75.000 in monthly non-compliance fees. Of course, that’s on top of the reimbursement owed to the victims of fraudulent transactions.

How to prevent exceeding the new fraud thresholds?

All merchants, especially those operating in high-risk sectors, should work closely with acquirers to develop effective risk control strategies, capable of matching the tightened monitoring thresholds. With the constant evolution of fraud techniques, the rising volume of fraudulent transactions and an ever-growing number of fraud victims, it is necessary for businesses to deploy payment gateways equipped with anti-fraud tools mitigating the risk. Nowadays, machine learning is there to help. Top-grade AI-based FDP solutions deploy predictive models designed to prevent fraud before it even happens. In the old days, payment providers would supplement their solution with a set of logics that would trigger a transaction denial in certain cases. But as scammers evolve, so does the technology necessary to effectively fight payment fraud. As Hubert explains:

“Using the full potential of data, merchants can shed light on the whole purchasing process and make predictions as to which customers are making purchases with fraudulent intentions. However, most often, merchants know about their customers only as much as they choose to tell them. Hence, it is necessary to use tool that reveal more information about each user. The process of picking up data and discovering patterns between variables unrelated at first glance - it serves as an effective tool in detecting fraud risk. Due to the volume and the complexity of data, machine learning is the most useful analytical tool.”

Machine learning is capable of making a judgement on whether or the transaction is fraudulent or not. This not only leads to 80% lower fraud and chargeback rates, but also helps in protecting business’s bottom line by reducing the “false positives” – legitimate customers erroneously flagged as fraudsters (for instance, users with a new mobile device browsing from an unusual holiday location).

Besides top-notch ML-based FDP systems, merchants who know that the 0.1% change might cost them, should consider switching into a payment gateway offering a from-issuer fraud alert system. It provides merchants with real-time updates on red-flagged cards - used by fraudsters in recent days or hours anywhere in the world. This solution can help twofold: primarily by preventing acceptance of risky cards, secondly - by allowing merchants to refund fraudulent transactions before they turn into chargebacks.

Final thoughts

Visa’s new rules will be effective as of 01.10.19 and will affect all merchants, especially those operating in the high-risk sectors. The most notable changes are in the ratios of fraud-dollar-to-sales-dollar and disputes-to-sales-transactions, across all threshold categories: Early Warning, Standard and Excessive. Standard thresholds, currently set to 1%, will be tightened to 0.9% as of October 1st. Along with VFMP and VCMP thresholds evolving, Visa’s instrument designed to monitor acquirers (VAMP) is tightening its thresholds too, meaning PSPs will be more cautious in accepting high-risk merchants.

Is that a reason to panic? Not at all! It is a reason to re-think the risk management strategies currently in operation, or, in most severe cases, deploy completely new mechanisms. Only merchants without comprehensive risk management strategies have a reason to worry. When working on the strategy to reduce fraud and chargeback rates it is best to utilise the latest technological developments to your advantage. To effectively fight fraudsters and prepare for the new rules, choose a payment provider who offers top-grade, AI-based fraud detection and prevention tools as well as alert systems supported by card issuers and clear risk management analytics.

Click here to learn more about Straal’s suite of payment solutions with FDP mechanisms included.

Michał Jędraszak

Chief Executive Officer

Michał jest doświadczonym menedżerem, który łączy dogłębne zrozumienie technologii z obyciem w biznesie. Przed dołączeniem do Straal rozwijał swoje umiejętności menedżerskie oraz analityczne w wiodącej firmie konsultingowej — The Boston Consulting Group — gdzie zajmował się doradztwem strategicznym dla organizacji sektora usług finansowych.

W Straal Michał odpowiada za tworzenie i wdrażanie strategii rynkowej firmy, koordynację działań rozwojowych oraz owocną współpracę ze wszystkimi interesariuszami.

Michał jest absolwentem Inżynierii Mechanicznej w Imperial College London.

Rownież może Ci się spodobać...
What is Subscription Management Software?
5 Sierpień 2019

Let’s face it: the subscription-based model provides you with loads of valuable customer data but, unless you hire a full-time data analyst, it’s impossible to make full use of them. Moreover, managing subscription plans of every single subscriber manually is a real nightmare. That’s why subscription management software has been created. What is it and how to make the most of it?

Czytaj dalej
Optimizing Card Payments: Smart Retry
19 Lipiec 2019

In the face of Subscription Economy, offering your merchandise in the form of a subscription-based service may seem tempting. Before you pivot, however, it is worth getting familiar with technology designed to make recurring payments more effective. Here comes Smart Retry aimed at increasing card authorization rate. How does it work and why should you implement it?

Czytaj dalej
What to Look for in a Payment Gateway? Part II
19 Czerwiec 2019

In my previous entry, I have proposed some basic questions an online merchant should ask before selecting a payment gateway. If you run a subscription-based business, you should get acquainted with several extra questions specific to your business model. A subscription-friendly payment gateway is a way to gain higher control over your business.

Czytaj dalej
What to Look for in a Payment Gateway? Part I
10 Czerwiec 2019

If you’re reading this, you’re probably searching for the best tool to collect payments from your customers and need to understand the differences between diverse solutions available on the market. Here’s a brief guide to selecting the right payment gateway for your online business.

Czytaj dalej
Subscription Metrics to Track and Optimize
9 Maj 2019

Customer retention is paramount for companies operating in the subscription-based model. One should learn how to measure it and make the most of the statistics at hand. What subscription metrics to track? And how to convert them into actionable insights?

Czytaj dalej
Predicting Your Subscriber’s Behavior
25 Kwiecień 2019

Despite the uniqueness of every customer, the purchasing process they carry out doesn’t vary so much from one to another: they follow specific patterns. The marketing concept of customer lifecycle can help you improve your commercial effectiveness. Learn how to make the most of your subscribers' behavior analysis.

Czytaj dalej
Customer Transaction Costs and How to Cut Them
28 Marzec 2019

Selling is all about addressing your customers’ needs. Offline or online, you seek to get to know your clients and offer them what they’re looking for. However, it’s a human thing that we like when things go quickly and effortlessly. On the internet, we can shop the way we like: saving our time and effort. But is it enough to let your customers buy online? Can you still make their shopping experience less absorbing?

Czytaj dalej
Anything-as-a-Service: the Future of Distribution
16 Styczeń 2019

Anything-as-a-Service (or XaaS) is a product distribution model, where companies shift from selling products to providing their value proposition as a service. Since XaaS can, quite literally, be anything, it isn’t hard to get lost in the jumble of buzzwords, jargon and concepts. This brief article will help you get an in-depth understanding of the new, service-based economy.

Czytaj dalej
4 Tips to Win the Holiday Shopping Season
22 Listopad 2018

Whilst Black Friday and Cyber Monday, or “Black Friday Weekend and Cyber Week” according to some experts, do not mean as much as, say, 2-3 years ago, the pre-x-mas shopping spree is still among the key determinants of the thickness of your top line. Here’s how to - in the realm of intangible merchandise - make the most of the daddy of all holiday sales.

Czytaj dalej
3 Tips to Grow Your Online Business
15 Październik 2018

Simplicity of User Experience, efficient billing model and a well-thought risk management strategy. These are the keys to unlock your business potential on the ever more competitive market of digital services, as uncovered by e-commerce professionals at the very first edition of Warsaw Ecommerce Tech Sessions (WETS) – a new series of meetups powered by Straal and Business Link.

Czytaj dalej
Your Business in the Face of Fraud
17 Lipiec 2018

Have you fallen victim to fraud? If the answer is "yes", I assume you have learnt your lesson and already thoroughly inspected what went wrong. The “no” answer does not exist in the case of fraud. It’s only “not yet”. Be my guest and let me invite you to explore the dark side of ecommerce.

Czytaj dalej
Is the Freemium Strategy Right for Your Startup?
20 Maj 2018

Look at you, a fledgling entrepreneur at the threshold of international success. I bet it feels fantastic to see your idea come to life. So now that you’re inevitably positioned for success, give your product away for free - that's how the freemium model works. But is it really that simple?

Czytaj dalej
When One Second Costs $2.5 Million
17 Kwiecień 2018

Your customers won’t wait or engage in cumbersome processes to get your products and - if your competitors are able to provide the service faster – why would they? Straal presents the mathematics of instant e-commerce. Lean on these statistics to put your business in the fast lane!

Czytaj dalej
The Essentials of Subscriber Experience
28 Luty 2018

In the times of flourishing sharing economy, we’re renting, sharing and getting access to everything we need. The line between products and services is becoming thinner and thinner, whereas possession is no longer guarantee for the customer satisfaction. What is in that case?

Czytaj dalej
4 Reasons to Migrate to the Subscription Business Model
8 Luty 2018

Do you remember the first time you sold your product or signed a contract for your service? I bet it felt good. Do you know what feels even better? Becoming a trusted provider of your services and products to your loyal customers. That lasting feeling is what the subscription-based business model holds in store for success-hungry entrepreneurs.

Czytaj dalej
3 Must-knows about the Role of Payment Solutions
16 Styczeń 2018

How do payment solutions chosen by your company influence your business performance? It's important to decide on such that will not only meet your current requirements but also support your development strategy in the long term and smoothly scale your business.

Czytaj dalej
5 Things You Should Know about the Payment Ecosystem
30 Listopad 2017

Fintech insiders oftentimes erroneously assume that consumers, let alone merchants, know much more about the payment ecosystem than they actually do. This might lead to disturbing misunderstandings, make companies miss business opportunities, consumers get a headache and vendors fritter away their marketing budgets.

Czytaj dalej
Pokaż więcej