By Melody Lashmar - Over the last few months I have been investigating and writing about consumer initiated fraud. I have been defining the issue, giving recent examples of the issue, providing data about the issue and demonstrating that it is a known issue and has been for quite sometime.
Along with providing to you a solid foundation of understanding regarding the issue of consumer initiated fraud, over the next few blog posts I am going to propose some ideas on ways the networks could actually tackle the issues that exist.
To sum up my previous conclusions, consumers lie and steal at a rate that easily surpasses the restrictions for fraud placed on merchant accounts, online transactions suffer from a lack of systems that can guarantee the identity of the person entering the transaction information, online purchasing is targeted by fraudsters with computer programs to find and use card numbers and finally, merchants, the most impacted party, must bear responsibility for addressing this fraud as there is no incentive for anyone else in the chain of the transaction to take corrective action.
Issue 1: Online transactions suffer from a lack of systems that can guarantee the identity of the person entering the transaction information.
The ideal solution is that a system is developed which positively identifies the consumer and provides the proof that the consumer does, in fact, have the authorization to use that payment method. This is a very tall order, especially for an online transaction. There are companies in the marketplace which attempt to address this issue by performing some check on the consumer’s system, or take a snapshot of their credit card, running pieces of the data through databases, but none of these checks guarantee that the consumer is who they say they are or the they have the authority to use that payment instrument. Further, this validation is an additional cost to the merchant and there is no guarantee that this will result in a legitimate consumer. The only tool out there is provided by the card associations through their Verified by Visa and MasterCard SecureCode that provided the consumer jumps through all these hoops and eventually successfully transacts with the merchant, the merchant is off the hook for the consumer claiming the transaction was unauthorized. Any way you look at these solutions, it is the merchant again who is being forced to forgo sales in hopes that they are eliminating the bad transactions and not the good ones.
For the issue that merchants that require online transactions are left with no adequate solution to guarantee the consumer or their authorization to use that payment instrument, I think the relevant question here is, “Does it make sense to have a chargeback ratio that is the same for all merchants and transaction types?” Looking at this issue very simply, do you expect that the rate of Chargebacks in a Card Present (Swipe) environment are the same as in a Card-Not-Present (CNP) environment? The answer is a resounding No. Let's ignore other factors such as the business type or if any previous relationship of the consumer to the merchants to keep this very straightforward. The simple fact that the online environment provides the anonymity that allows for misuse of payment instruments and the guilt free environment for consumers to say that they didn't receive something when in fact they did creates a naturally more frequent occurrence of Chargebacks.
The rules do not accommodate for this behavior, however. In the spirit of equality all merchants and transactions are created equally when it comes to Chargeback ratios and fines, that is, within a region. Unfortunately, these same transactions already cost the e-commerce merchant more in transaction fees, validation services to control the fraud, lost sales in the efforts to eliminate the fraudulent transactions, lost sales in Issuing Banks rejecting the transaction with their fraud filters and Higher Chargeback fees and fines for crossing thresholds. If your business is designated as registered high risk you also have to pay an annual fee just to have a merchant account. It seems that the spirit of equality stacks the deck against online merchants, afterall.
The simple solution is to provide a different ratio standard for ecommerce merchants. This is not challenging to implement because ACH has a WEB designation on their transactions and the card associations have a Merchant Classification Code that designates the merchant type resulting in the classification already being clear. The payment associations already acknowledge that these transactions are different requiring special handling, specific authorization and higher pricing but when it comes to Chargeback Ratios, that element, they've left as equal. If you were to question them on that equality, they will tell you that the network as a whole is operating well below that so they are already giving leeway for higher returns. They will even say at least four times the return level of the network as a whole.
Wow up to four times the return level of the network...that is very generous, right? Sure it seems that way but the number they refuse to share is the return rate for online transactions. What is normal for that type of transaction? Well dear readers, it is much higher than the network average of all transactions that include utility payments, car loans, rent, grocery shopping, retail, restaurants, etc. but let us not confuse the issue with common sense.