Visa’s Friendly Fraud Rule Change Could Cut $1 Billion From Small Firms’ Chargeback Costs

Visa Inc. is touting recent changes to how chargebacks that could be first-party fraud, also known as friendly fraud, are processed as potentially saving small businesses globally $1 billion in costs over the next five years.

Expectations are that the streamlined process will increase merchants’ ability to provide more accurate data that could root out the fraud without impeding legitimate chargeback transactions. How bad is friendly fraud? Nearly three quarters of the 300 merchants in a Chargebacks 911 survey released in May saw a 19% increase in illegitimate chargebacks on average in 2023 compared to the same period last year.

“With the rise of e-commerce, first-party fraud, or friendly fraud, where a cardholder disputes a legitimate purchase with their issuer, is becoming a significant challenge for merchants, often leaving them with devastating financial consequences that can impact their bottom line,” Paul Fabara, Visa chief risk officer, tells Digital Transactions News in an email. Visa wants to reduce all types of fraud in its system, he says, and it is “empowering merchants to protect themselves by providing them with more ways to prove that a disputed charge was in fact intentional.”

Among the elements of the program, which was announced in June, is standardization of the way data and evidence will be accepted. Merchants will be able to use data they have on hand to create a historical footprint of the relationship between cardholders and merchants, Fabara says.

“Issuers will receive and review this anonymized evidence to efficiently understand the nature of the transaction. This helps business owners keep money [that is] rightfully theirs while protecting legitimate cardholder activity,” he says.

Specifically, Visa introduced Visa Resolve Online, a platform that clients use for disputes that can assess and validate that the information supplied by the merchant meets the rules criteria. “The criteria that must be met to identify the transaction [were] designed to demonstrate a historical relationship of legitimate transactions between the cardholder and the merchant prior to being able to identify a false fraud dispute,” Fabara says. “Additionally, merchants can use Order Insight, through Verifi, to automate the return of evidence pre-dispute to avoid the dispute before it even happens.” Verifi is a dispute-management firm Visa acquired in 2019.

“With the rule change, we’re simply adding a set of checks and balances, supported by Visa, to ensure we are identifying accurate fraud disputes and providing the necessary information to evidence when a trusted cardholder participates in a transaction,” he says. “Issuers could then utilize this information on the relationship between the merchant and cardholder in their investigation and rebill or assume the loss.”

Fabara says the rule change applies to Visa credit and debit cards. Visa announced the rule changes in 2022 that went into effect in April 2023.