Visa Chargeback Changes and VMPI: What merchants need to know
By Karisse Hendrick /
13 Apr 2021
For years, card-not-present merchants have felt like the chargeback process is unfair, unclear and untimely. Visa has heard these complaints and criticisms loud and clear, and as a result, have made significant changes.
The new program is called Visa Claims Resolution (VCR). The goals of the new program are to:
- Reduce the time a transaction is in financial limbo in the chargeback process
- Ensure both sides of the dispute are following the chargeback rules governing this process
- Provide clarity to when a chargeback can and will be reversed.
The Biggest Change: A new data-driven management system
Visa has created a new, more data-driven management system that will automatically identify & block disputes that don’t meet the necessary criteria for the selected dispute category. The goal is to reduce invalid disputes, which we’ll cover in more detail later in this post.
A natural question you might be asking yourself is: “what is the necessary criteria?” Not surprisingly, the answer will differ based on the type of dispute you encounter. Visa has committed to “leveraging existing data wherever possible,” but they reserve the right to request additional data should it improve the decision making process.
Based on the data an issuer and Visa have about a transaction, they can determine in an automated way if that information meets the minimum required thresholds for a chargeback. If not, it will not be passed on to the merchant. If the initial information is within the timeframe for a chargeback and other criteria is met, the chargeback will be filed and sent to the merchant to provide additional information about the transaction only the merchant has access to, such as transaction details, the shipping address, IP or device information, etc. This second step will look similar to the merchant as the existing process.
Previously, both “sides” of a chargeback dispute were like two intramural basketball teams, playing by a common set of rules and guidelines published by the card brands, but without a referee present at the game.
It was up to the issuer (representing the cardholder) and the merchant processor (representing the merchant) to abide by the rules. And unless a dispute made it to arbitration, which wasn’t often, the process was largely self-governed.
If a chargeback was filed by the issuer after the allowed time frame, the merchant processor had to catch it and dispute it. If a merchant didn’t provide the exact information required for a specific reason code, the processor could reverse the chargeback in the merchant’s favor in a first-time chargeback, though the issuer would often reject the representment with a second-time chargeback, resulting in a debit to the merchant and unnecessary steps for both sides.
Although Visa can’t put an actual person in charge of each dispute, the new management system will act as a “referee” of sorts.
Less time to dispute chargebacks
Currently, a merchant processor and merchant have around 45 days to respond to a chargeback – including notifying the merchant, the merchant providing a response, and the processor providing this documentation to the issuing bank.
Under the new process, the timeframe will be shortened to 30 days (with the ultimate goal of 20 days, at a future date to be determined). While the exact time a processor gives a merchant to respond to the chargeback varies, it is safe to assume this will be shorter than it is currently.
If you don’t have an automated or semi-automated way to respond to chargebacks now, this is something you should consider. Furthermore, this full or semi-automation should be adaptable to additional shortened time frames in the future.
Fewer chargeback reason codes
Under the legacy Visa Chargeback system, there are 22 chargeback reason codes (And remember, this is just for Visa. All card brands have their own number of codes). Under the new VCR process, there will be 4 dispute categories: Fraud, Authorization, Processing Errors and Consumer Disputes.
Each of these categories have subcategories that better describe the specific situation. For example, you could receive a “Consumer Dispute” chargeback in place of current reason codes such as “Merchandise/Services Not Received”, “Canceled Recurring Transaction”, “Not as Described”, or for 6 other instances.
It will be important to continue to track these sub-reason codes for business intelligence, to better understand why cardholders are filing chargebacks towards your company.
There will be two separate processes for handling disputes, depending on the categories selected. If you are receiving a chargeback in the “Fraud” or “Authorization” categories, there will be an automated decisioning process, prior to the merchant being notified of the dispute.
This automated decision process will free up a lot of the back and forth that currently takes place in the system. These are the hard rules being enforced now that the referee is present in the “game.”
For chargebacks in the “Processing errors” or “Consumer Disputes” category, issuers will be required to fill out an enhanced “Dispute Questionnaire” that will ensure that all required information is captured before the dispute can be initiated. This will allow for a quicker, more efficient process and that the issuer is complying with the criteria for filing a chargeback on the cardholder’s behalf.
Reduce invalid disputes
In their analysis of the current chargeback process, Visa identified ~5 million invalid disputes in their system, which accounted for ~15% of all chargeback volume. While most of these were reversed by processors and/or merchants throughout the dispute process, these chargebacks muck up the system and leave room for error, usually at the merchant’s expense.
With the changes, issuers and merchants will communicate about chargebacks on the Visa system, requiring issuers to select the exact transactions being disputed. This automated system will allow chargebacks to proceed to the merchant if they meet specific criteria, eliminating chargebacks for transactions that are too old, have been refunded, or participated in 3D Secure.
Additional Fraud Rules/Processes—Benefits to Merchants:
Visa will also apply new rules to the dispute process to target both card-present and card-not-present fraud. The following rules will be enforced once the VCR goes live:
- Maximum fraud per (credit card) account- Visa will place a limit of 35 card-not-present fraud disputes per credit card account number within a 120 day time period; this is across all CNP merchants, limiting cardholders that habitually file fraud chargebacks when they took part in the transaction (also known as “friendly fraud.”)
- Block future fraud if account not closed- While an issuer is currently asked to cancel a credit card once a fraud chargeback is received, there currently is no accountability if a card is not canceled and future fraud chargebacks are filed. With VCR, Visa allows the issuer to determine if they will re-issue a new credit card number. However, if further fraud chargebacks are initiated by the cardholder on a card that was left open after a fraud chargeback is filed, the system will prevent the issuer from filing future chargebacks on that account.
- Bundling- If certain conditions apply, merchants may “bundle” their response where multiple transactions occurred on a single account and Merchant ID (MID), A single response questionnaire is used to reply to multiple disputes at once.
Overall, these massive changes to the Visa chargeback process promise to reduce dispute volume, provide proactive dispute resolution, identify, track and monitor abuse and to increase the customer experience for all stakeholders.
But, if you aren’t yet prepared for the implementation of VCR, it’s important to be aware of the updates and changes and have a plan to respond to chargebacks faster, have a process to evaluate whether you have the required response documentation for each reason code (especially fraud chargebacks) and to be prepared to respond to chargebacks in the shortened time frame.
What About VMPI?
What is VMPI?
VMPI was started after Visa saw over 2.6 million chargebacks initiated in 2015 because cardholders did not recognize the transactions, which was an increase of over 13% from the prior year. The cost of working disputes, along with the dispute fee, can end up being more expensive than the transaction. So, Visa created a way for merchants and issuers to prevent invalid disputes from occurring.
With the VMPI integration, merchants can provide detailed company, customer, order, and product information to card issuers on-demand. This connects merchants to millions of cardholders working with thousands of different financial institutions. Ultimately, VMPI empowers representatives at your customer’s financial institution to stop invalid disputes from being filed against you.
Why integrate to VMPI?
Three statistics illustrate the current state of the dispute landscape:
- In 2017, $31 billion was lost to chargeback costs.
- Merchants were saddled with $19 of that $31 billion.
- In 76% of cases of suspected fraud, customers bypass the merchant and go directly to their card issuer, which leaves merchants with little opportunity to intervene.
VMPI addresses this situation by improving the dispute process for merchants through real-time communication. When connecting to VMPI, merchants will receive issuer notifications. Issuer notifications (through VMPI) allow merchants to receive a request for more information, as well as notifications when a transaction has been reported as fraud, disputes are finalized, and when the cards have been blocked from further purchases with a stop payment request. These notifications allow the merchant to resolve a problem or refund a transaction and take other preventative steps.
VMPI integration options
Merchants can opt to connect to VMPI by directly integrating to Visa and do the integration work themselves. But, the lack of development resources, time restraints, or other factors can make the integration process too challenging for merchants to do it themselves.
When VMPI was initially released, it was only possible for merchants to connect directly through Visa. This caused problems because there were limited staff and availability, which narrowed VMPI’s scope to only large merchants. Because of this issue, Visa introduced VMPI facilitators that allow all sized merchants to be able to connect to VMPI. By going through a VMPI facilitator, merchants are able to easily and quickly become integrated without any integration work on the merchants’ end.
Chargeback is a Visa approved VMPI facilitator. This means through Real-time Resolution (our VMPI integration solution) Chargeback has already done all the heavy lifting by building the integration to VMPI. To get started, merchants will just need to provide their CAID (Cardholder Acceptance Identification Number) and BIN (Bank Identification Number). After that information is provided, you will be connected to VMPI. By using Chargeback’s integration, merchants can start preventing disputes and protecting revenue right away, without any integration effort.
Visa purchase return authorization
Purchase returns are part of every business. However, the return process is often unclear for customers and can expose merchants to fraud. Visa® created the Visa Purchase Return Authorization Mandate to bring transparency to the returns process. This post will explain the new mandate and outline how merchants can comply.
What is a Visa purchase return authorization?
The Visa Purchase Return Authorization is a new directive that requires merchants to request authorization for every return transaction (cardholder refund) that they make. This mandate is similar to the process of seeking authorization from the card issuer when processing a purchase only that it occurs in reverse.
Why is Visa introducing this?
Visa is introducing this mandate to drive transparency in the return process for cardholders. Previously, cardholders were in the dark about whether their purchase return requests had been accepted or denied. It often took between two to five days for information about purchase returns to be reflected in the transaction history of the cardholder. Conversely, information about purchases is updated instantly, which creates an imbalance. Visa purchase return authorizations will correct this imbalance by updating cardholders about return transactions in real-time. On the merchant side, purchase return authorizations are expected to provide the following benefits:
Improved customer satisfaction and experience because cardholders will have real-time access to information about the status of their returns, which eliminates uncertainty.
Reduced purchase return related customer service inquiries as a result of access to real-time information about the status of their refunds. This will improve the overall experience of all customers due to increased access to customer service representatives.
Enables real-time validation of cardholder accounts, making it possible to flag and decline fraudulent purchase return requests and cards.
Reduced chargebacks related to the return request because the return authorization will be displayed in the cardholder’s transaction history. This reduces friendly fraud and duplicate refunds.
Are merchants required to support this?
Yes, all merchants are required to request authorization for every return transaction. If you don’t comply, you will be in breach of Visa’s rules, and non-compliance might lead to an increase in the fees that you pay, such as Zero Floor Limit Fees and Visa Misuse Fees. Additionally, you are more likely to receive chargebacks for carrying out transactions without authorization.
What are the requirements for merchants?
No special equipment is required. Merchants are only required to comply with the mandate. The following steps will ease the transition process:
- Ensure that your Point of Sale (POS) system is capable of requesting purchase return authorizations and receiving responses. Update it if necessary.
- Analyze your customer refund workflow and update it to include the process of getting purchase return authorizations. This ensures that your employees do not forget to seek authorization.
- Train your employees on how to request authorizations so that their skills are up to date.
What is the procedure for submitting a purchase return authorization request?
Here are the steps that you should follow when a cardholder makes a purchase return request:
- Confirm that the purchase was made using a Visa card
- Key-in the purchase return details into your POS system
- Initiate an authorization request to the cardholder’s bank
- Wait for a response to the authorization request
- If an approval response is received, complete the refund process as usual
What is the meaning of the responses received after requesting a purchase authorization?
There are three possible responses: ‘approved,’ ‘no reason to decline,’ or ‘declined’ with a reason. These responses fall into two broad categories: approved or declined.
- If an approved (code 00) response is received, process the refund and credit the cardholder.
- Similarly, if a no reason to decline (code 85) response is received, proceed with the refund process and credit the cardholder’s account.
There are several reasons why a purchase authorization might be declined. They are as follows:
- The account number or type provided is invalid (code 14). Inform the cardholder that the account number is not recognized by the bank and request for an alternative Visa card or refund them using other methods (cash, gift card).
- The account type is invalid (codes 39, 52, or 53). Request the cardholder to enter the correct account type (credit or debit) into the POS.
- The card has expired (code 54). Let the cardholder know that the card has expired and request for a replacement card. If there is no replacement card or alternative Visa card, refund them using other methods (cash, gift card).
- The PIN is invalid (code 55). Request the cardholder to re-enter their PIN.
- Declined without reason (all other decline codes). Request for an alternative Visa card or refund them using other methods (cash, gift card).
How can merchants lower the number of declined responses?
Declined responses happen when there are user errors such as an invalid PIN or an invalid account type. Merchants can reduce these errors by encouraging cardholders to input their details correctly before they send purchase return authorization requests.
A declined response can also be received because a card is invalid. Invalid cards are those that are expired, have been reported lost or stolen or discarded prepaid cards. The number of these cases can be lowered when merchants first ensure that cards are valid before requesting authorization.
Are merchants required to swipe, tap, or dip the card used in the original transaction before requesting authorization?
No, the original card does not have to be represented. Merchants can send authorization requests by scanning the original purchase receipt, which will automatically bring up the card details.
What is the process of submitting an authorization request when the card is not present, and the receipt barcode is scanned?
Merchants should input the PAN and expiration date of the card in their return authorization request using POS entry mode 01.
Should merchants change their return/refund policies because of these new regulations?
No, merchants do not need to change their refund/return policies as long as they are legal and are shared with customers upfront. The only thing that merchants need to change is how they process refunds by requesting a purchase return authorization.
Karisse has twelve years of practical experience in the online fraud and payments space, with a strong focus on process improvement and overall strategy development to minimize risk, while maximizing revenue. She is a consultant at Chargelytics Consulting and the editor-at-large at CardNotPresent.com.