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How Payment Facilitators Mitigate Losses Due To Chargebacks

Payment Facilitators must protect themselves from fraud and compliance risk.

Tuesday, February 11th, 2020

Many of the existing fraud prevention measures cater to card-present environments. Some credit cards, such as Visa has released numerous anti-fraud measures to make the reproduction of their cards extremely challenging. This includes holograms and embossed security characters on the face of each card. In this case, merchants are off the hook and not liable for fraud when these card-present transactions are authenticated correctly.

Conversely, online platforms facilitate card-not-present transactions, where a buyer enters their information on the website itself and therefore does not get physically verified by a cashier. As a result, these types of transactions are highly vulnerable to fraud and abuse. Here, the merchant and the payment facilitator are held responsible.

According to the Nilson Report released in October 2016, fraud losses to merchants occurred mostly from CNP (Card-not-present) transactions. It appears that this problem is beginning to worsen. The total losses to CNP fraud reached an astonishing $5.65 billion. The losses to card issuers worldwide hit $15.72 billion, making up 72% of gross fraud losses worldwide. By 2020, it is estimated that card fraud will reach a total of $31.67 billion worldwide.

When a cardholder brings a dispute about a charge to their bank, the bank may return the payment back to the cardholder. This is done after a thorough investigation has taken place. This reversal of a completed transaction is known as a chargeback.

Payment Facilitators Caught In The Middle

Payment facilitators (PF) face a slew of challenges in this payment landscape. Under contract with acquirers, PFs are responsible for chargebacks. In the event that the PF fails to recover the funds directly from the merchant, the PF is responsible for that transaction amount.

The PF essentially sits between the acquirer and the merchant, especially if the merchant is accepting payments exclusively through the PF. Both the PF and the acquirer handle the chargeback process, answering any documentation requests.

What A Payment Facilitator Can Do To Mitigate Risk


Because the PF will be susceptible to losses from these chargebacks, it will need to enforce risk and fraud mitigation practices to protect themselves from those losses.

As part of the underwriting process, PFs can screen for merchants that are fraudulent or show signs of potentially generating an inordinate amount of chargebacks.

Another plan of action to thwart risk is to provide low processing limits or implement vigorous monitoring of transactions to keep an eye out for suspicious activity of the merchant.

Staying Ahead In The Fight Against Fraud

Fraudsters are becoming increasingly agile. They are currently exploiting the digitalization of payments to create new fraud tactics. Payment facilitators need to constantly adapt their prevention strategy by using innovative technology.

They must evaluate their current tools, processes, and measures. By anticipating changes and ever-evolving technologies, it will keep them ahead of any fraudster’s ingenuity. This will equip them to create adaptable and effective fraud-fighting resources.