Reduce Disputes With Real-time Fraud Monitoring

There are many forms of fraud. In the payments space, fraud refers to unauthorized credit or debit card transactions. This can include transactions made via stolen card numbers, merchant identity fraud, or false refund requests (also known as “friendly” fraud or chargeback fraud).

In the broad sense of the word, a dispute is a disagreement or argument between two parties. In the case of payments, a dispute is when a consumer claims a transaction posted to their account is unauthorized or fraudulent. A dispute can also be the result of goods not received or not as described.

A chargeback is the outcome of a dispute if a merchant accepts a dispute or is unsuccessful in fighting the chargeback. This involves a payment reversal, which is initiated by the issuing bank. This means the customer’s account is refunded for the specific transaction.

What is a partial chargeback?

Sometimes, a dispute isn't for the full amount or circumstances don't allow for a full refund. The outcome would then be a partial chargeback as the cardholder is only getting a portion of the disputed charge returned to them.

Common chargeback reasons

There are many reasons why someone would file for a chargeback. The top reasons include:

1. Product or service not as described

2. An item is defective or damaged or a service does not work

3. Goods or services did not arrive on time

4. Fraudulent purchases

5. Merchant errors, such as data entry, fulfillment, or shipping errors

6. Buyer’s remorse or friendly fraud

7. Family purchases made on a cardholder’s account

Visa chargebacks

It’s also important to understand how chargebacks are handled by card brands. Visa has its Visa Dispute Monitoring Program (VDMP), which is based on set thresholds. It has early warning, standard, and excessive thresholds based on dispute count and rate. Visa's standard monthly chargeback threshold is 0.9% or 100 disputes. If this amount is exceeded for more than four months, you'll be fined $50 per dispute. Penalties increase as time goes on if you remain above the threshold. Merchants have 30 days to respond to each phase of a chargeback unless it’s escalated to arbitration, which would require a response within 10 days.

Mastercard chargebacks

Like Visa, Mastercard also has a chargeback monitoring program. It's called Excessive Chargeback Program (ECP) and consists of two levels, excessive and high excessive. Mastercard’s monthly chargeback threshold starts at 1.5% or 100 chargebacks in a month, with fines starting at $1,000 after two months, which increases over time. Mastercard gives businesses 45 days to challenge a chargeback and 30 days to accept pre-arbitration.

Both Visa and Mastercard expect businesses and cardholders to work together to resolve a dispute first, before taking further action.

Discover card chargebacks

Discover is a bank and issuer and therefore manages the chargeback process end-to-end. A major difference between Discover, Visa, and Mastercard is that it prohibits businesses from contacting cardholders. Instead, cardholders work directly with Discover to dispute a transaction and businesses have 45 days to respond. While they don’t have a set threshold, over 1% would be considered excessive chargebacks.

American Express chargebacks

American Express has a similar process as Discover in that it’s an issuer and deals with customer disputes directly. If a customer has compelling evidence, American Express will issue a chargeback immediately. The business typically has a 20-day window to respond to the chargeback. It also considers chargebacks over a 1% monthly ratio excessive.

Regardless of the reason behind the dispute, the customer’s goal is to get their money back. This entails the customer filing a claim with their credit card company. Once the dispute is filed, the cardholder bank hands it off to the processor, who then forwards the dispute to the merchant (via the payment facilitator, if they have one).

But a dispute isn’t an automatic “win” for the cardholder.

Just as the customer has a right to dispute a transaction, a merchant has a right to challenge the claim. Once the merchant receives a dispute, it has the option to accept or reject it.

Here’s a visual representation of what the dispute cycle looks like:

Once a cardholder files a dispute, the funds are reversed and the merchant’s account is debited. If the merchant accepts the chargeback amount (or ignores it), the process stops there and the money stays with the cardholder. If the merchant rejects the dispute, they begin the representment process.

What is a dispute/chargeback representment?

A representment is when a merchant disagrees with a claim and submits evidence to prove a charge was valid. Examples of evidence include documentation related to the purchase, such as shipping confirmation, transaction record, which includes the captured address details and card CVV, and any acknowledged terms of agreements, etc.

If the issuing bank deems the charge was valid, the cardholder’s claim is overturned and the merchant is credited back the funds. This is called a chargeback reversal.

At Finix, we make managing disputes easy. We let you manage disputes and submit evidence directly through our dashboard and you’ll always have a transparent view of wins and losses. You can also use Finix API to integrate dispute management into your platform.

Who is responsible for resolving disputes?

When a cardholder files a dispute, the PayFac (Finix) collects the funds from the merchant, who is also liable for the full amount of the chargeback—despite having paid transaction fees. It’s the merchant’s responsibility to fight the claim and start the representment process. If the merchant wins the dispute, the PayFac is responsible for crediting their account.

Finix manages this process for you. For instance, when you or one of your customers experiences a dispute, Finx automatically deducts the disputed amount from your account and the chargeback amount is placed in a For Benefit Of (FBO) account until the dispute is closed.

Our payments team also reviews disputes daily and keeps a transparent line of communication open about the process. In other words, we don’t just throw you to the wolves!

If a charge is fraudulent who is on the hook for it?

The truth is, banks just don’t have the time to investigate every customer that says “it wasn’t me.” So, even though a merchant has the right to fight a customer dispute, in most cases, the cardholder’s “word is bond” to the issuing bank and the burden of proof falls to the merchant.

Unless the merchant provides sufficient evidence during the representment process, the funds credited back to the customer after they file a dispute will remain with them, as the merchant is responsible for the refund. Even if a charge is truly the result of fraud, it’s the merchant who absorbs the cost.

If the merchant can’t pay due to bankruptcy, for example, then the payment facilitator becomes responsible.

First and foremost, take what measures you can into your own hands by pinpointing and correcting any weaknesses and holes in your business model that may make you more susceptible to fraud. Not doing this is like leaving your front door unlocked with a sign on it that says “no one’s home right now.”

Even when you’ve done everything in your power to “fraud-proof” your business, real-time fraud prevention technology is an essential piece of the puzzle. Based on fraud rules and the use of artificial intelligence (AI) and machine learning (ML), fraud monitoring services continuously monitor purchases and consumer session behavior, as well as visitor IP addresses and the devices used to access your platform. This allows the fraud prevention service to detect and prevent potentially fraudulent transactions.

At Finix, for example, we developed a Fraud Detection API that you can integrate into your platform to minimize your chargeback losses. This API automatically captures data from your customer-facing website and monitors transactions in real time. Finix’s APIs are also highly reliable, which is critical when it comes to payments in general, as well as fraud detection—we handle billions of requests per year with 99.999% uptime.

High-risk businesses that are more susceptible to fraud

Another factor that affects disputes is the merchant category. There are some businesses that are considered higher risk and are more prone to fraud than others. The card networks determine which categories are high risk.

Visa considers the following card-not-present (CNP) merchant category codes (MCCs) high risk:

• Drugs (proprietaries, druggist sundries)

• Drug stores and pharmacies

• Direct marketing (travel services, outbound telemarketing, and inbound telemarketing)

• Cigar stores/stands

• Dating services and escort services

• Betting (lottery tickets, casino gaming chips, off-traffic betting, etc.)

There are also in-person (card-present) categories that are also considered high risk. You can find a full list of MCC codes and their requirements from the card brands: Visa Merchants Data Standards Manual, Mastercard Quick Reference Booklet, American Express Merchant Regulations, and Discover.

The dramatic increase in online card payments in recent years has also resulted in a surge in fraud. A recent Nilson report found that fraud rose more than 6% (exceeding $10 billion) in 2020 from 2019, with the U.S. accounting for 35.83% of card fraud despite only contributing 22.40% in card volume globally.

This is a clear indicator that fraud monitoring should be a priority in 2022 and beyond, and why it’s vital to work with a PayFac like Finix that provides real-time fraud monitoring. This helps save your platform a lot of time (and money) by reducing the number of hours needed for managing disputes.

For instance, fraud monitoring can flag transactions that fall outside the scope of financial details provided during underwriting, identify excessive transactions from the same bank identification number (BIN), and alert you to an increase in dispute/chargeback rates.

Real-time fraud monitoring also saves your customers money as they won’t have to pay for the fraudulent chargebacks or the resulting chargeback fees. In fact, a recent study found that companies using fraud prevention and that follow best security practices see 71% less successful fraud attacks in overall volume.

Less fraud also helps strengthen and protect your brand’s reputation. Working with a PayFac that provides a strong fraud monitoring and prevention service is key to your platform’s success and your bottom line.

Want to learn more about how Finix can help your platform reduce fraud? Reach out and let us know. We’re here to answer all your payment questions.