Help is on the way for merchants that are swamped with friendly-fraud chargebacks. Friendly fraud occurs when a customer makes a legitimate purchase, then requests a refund, often because the consumer has forgotten the transaction took place.

Visa is introducing its Compelling Evidence 3.0 rule set, which allows merchants to submit historical purchase evidence to prove a legitimate cardholder was behind an order. The rules are based on the assumption that if a cardholder has engaged in previous transactions with a business and those transactions were not disputed, then the current transaction is not fraudulent.

The new rules require the same data elements to match across undisputed and disputed transactions, with transactions using the same payment method and settled at least 120 days prior to the dispute. Importantly, the new system allows evidence to be submitted before a chargeback is filed. If certain elements are decisively proved, the fraud claim will be denied.

For merchants, this is all good news that is likely to reduce their chargebacks dramatically, but it also means they must get their data collection in tip-top shape to meet the standards of Visa’s new rules.

In a recent podcast, Navin Sequeira, VP Global Chargeback Operations at Chargeback Gurus, and Brian Riley, Head of Credit at Javelin Strategy & Research, discussed the size of the friendly fraud problem for merchants, how VISA CE 3.0 rules are going to change the lives of merchants, and how merchants can best prepare. This article provides some of the key highlights.

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Friendly Fraud: The Nemesis of Merchants?

Friendly fraud is a growing issue for merchants, causing significant financial losses and reputational damage. This occurs when a cardholder disputes a legitimate transaction, often because of confusion or forgetfulness, but such disputes can also result from deliberate misuse of the chargeback system.

From the merchant’s perspective, if the same cardholder has made similar purchases in the past without disputing them, there is a good chance that the transaction in question is also legitimate. However, current Visa regulations don’t require banks to consider this evidence, making it easier for customers to commit friendly fraud.

“Estimates suggest that friendly fraud accounts for 60 to 80% of all chargebacks, which cost merchants approximately $40 billion annually,” Sequeira said.