Chargebacks may be evil, but they are also interesting because they hold the fabric of the payment card ecosystem together and play a really necessary role in providing protection and trust to consumers.
By using EMV 3DS to authenticate transactions, merchants will never see many of the most problematic chargebacks.
Chargebacks are interesting because they hold the fabric of the payment card ecosystem together and play a necessary role in providing protection and trust to consumers. As with all good things, the unintended consequences of overuse is particularly toxic.
To make matters worse, at every given point in time, merchants must meticulously monitor the health of their MID to avoid serious repercussions from the payment brands. 3DS is the tool that keeps the balance between the necessity and abuse of chargebacks.
This post has two purposes: first, to explain why and how the industry came to this point, and second, an unabashed promotion.
A chargeback is simply a mechanism a cardholder uses to reverse a transaction with a merchant, hence the creative name "chargeback." The principle is that they can claim back their money, or request a chargeback if the cardholder has actually suffered a loss; for example, if the cardholder did not authorize the transaction or ordered one item and received another.
So how did we get to a system like the one we have today? Let us look at the history of payments.
In the early days of the face-to-face payment card business, the concept of chargebacks had to exist to give consumers confidence that they were insured against the "bad behavior" of merchants.
The original premise of payment cards was that there would be three things to make a good transaction possible:
The card
The merchant
The cardholder
In general, the merchant was protected if these three things were present and the issuer authorized the transaction. An interesting result of the evolution of the different card products (co-brand, corporate, fleet, payroll, etc.) is that merchants must effectively perform circus acrobatics to understand what they will be paying this month.
The folks at chargeback gurus do a great job explaining this problem faced by merchants.
During the expansion of the US in the 19th century, major retailers like Sears sent thick catalogs throughout the US, and people could buy almost anything. This was made possible by convenient and cheap rail (the first US boom/bust was rail transportation).
As the use of payment cards began to grow, the industry had to deal with remote or “non face-to-face” transactions; creatively referred to as "Mail Order, Telephone Orders" or MOTO for short.
MOTO presented a challenge to the payment card industry, as the card and cardholder were no longer present. The payment industry met this challenge by shifting liability so that merchants can perform these remote MOTO transactions but a the cost of taking the risk of the transaction.
Today, the majority of "non face-to-face" transactions aren't MOTO - They are eCommerce. Unfortunately, that means merchants bear the burden of online fraud and this includes chargeback fraud.
Chargeback fraud is nearly impossible to prevent. It involves legitimate customers calling their bank and claiming they didn't make a purchase when they did. That's how the costly, and time-consuming chargeback process begins.
3DS is the answer, it was created and commercialized to fix this problem, namely to provide eCommerce merchants with the benefits of face-to-face commerce. 3DS shifts the fraud liability off merchants and to the issuers bank.
If you are an e-commerce merchant, CRM, ISO, fraud mitigation company or reseller please reach out to PAAY so we can help improve your bottom line.
Additionally, if you're attending WSAA in Texas next week, please come see us at booth #90 or click here to set up a meeting.