First-Party Misuse and Friendly Fraud Are Out of Control
Why Merchants Must Adopt EMV 3-D Secure (3DS) to Control Rising CNP Chargeback Abuse
First-party misuse (FPM) or First-party fraud (FPF) - where customers make legitimate purchases and later dispute them - is one of the most expensive threats facing digital merchants today. According to the Merchant Risk Council (MRC), FPM now drives nearly half of all chargebacks. Even worse, merchants win less than 20% of fraud-coded disputes, meaning that once a chargeback hits, the work done to recoup losses is rarely successful.
At the same time, current card-not-present (CNP) fraud trends indicate that in the age of AI, CNP fraud and eCommerce chargebacks are expected to rise. Despite these significant threats to revenue, many merchants still underutilize the gold standard for chargeback prevention that addresses both sides of the problem: EMV 3-D Secure.
3-D Secure (3DS) authentication is one of the only tools that both prevents fraud and guarantees a liability shift. 3-D Secure shifts liability for CNP chargebacks away from the merchant under the 3DS cardholder authentication programs run by the major card brands. 3DS uses rich data – device information, behavioral signals, account history, merchant risk data, and an issuer’s risk engine – to facilitate issuer authentication, allowing banks to block fraud at checkout before it becomes a dispute.
3-D Secure is the most effective countermeasure to reduce chargebacks stemming from cardholder dispute abuse and first-party misuse. 3-D Secure provides strong evidence that the customer did authenticate and agree to the purchase, making it harder for cardholders to claim lack of involvement in cases of FPM. Even more, it discourages repeat chargeback fraud incidents. When a customer authenticates via 3DS, either silently through risk-based checks or actively through a step-up challenge, issuers gain high-quality, time-stamped authentication data, including device information. When a cardholder attempts FPM, the established pattern of successful transactions and device information becomes the strongest available proof that the legitimate cardholder was, in fact, party to the transaction, the transaction was authorized, and the dispute lacks merit.
The strength of this proof is enshrined further by additional FPM programs operated by VISA and Mastercard. Both schemes operate enhanced Compelling Evidence and First Party Trust programs in addition to the standard cardholder authentication programs. These programs are intended to reverse first party chargeback disputes “in-network.” These reversals occur when the merchant has provided EMV 3-D Secure-based data elements on prior good (non-fraud) transactions by the cardholder.
With both friendly fraud and card-not-present fraud on the rise, and chargeback win rates low, authentication and authorization are no longer separate events. They are a single data-driven decision that protects merchants and the customer experience while driving improved authorization performance. 3-D Secure (3DS) is the only solution that simultaneously reduces CNP fraud, reduces chargebacks considered friendly fraud, shifts liability, prevents illegitimate disputes, enhances approvals, protects merchant dispute ratios, and strengthens the customer experience, all within the authentication and FPM mitigation programs provided by the world’s major card brands.
Merchants that do not use 3DS are exposed to significant risk and revenue loss. Even more, they are failing to leverage chargeback prevention that is already at their fingertips. Merchants resisting 3DS adoption are often relying on legacy impressions of 3DS 1.0, which no longer reflects today’s 3DS capabilities. EMV 3-D Secure, powered by risk-based authentication, is essential for a modern payments and fraud-prevention strategy, serving as the most reliable path to protecting margins and controlling chargebacks and chargeback abuse.
About Us
Arcot, Payment Security Division of Broadcom is the recognized global leader in 3-D Secure (3DS) digital payment solutions. Major financial institutions, including card issuers, merchants, and payment processors, rely on the Arcot Network to verify the identity of a shopper during an e-commerce payment. As part of Arcot’s mission to ensure merchants receive the highest levels of security and approval rates for e-commerce transactions, Arcot is now offering merchants an opportunity to utilize the Arcot issuer base (5k+ issuers) and collaborate to increase approval rates by over 7% and enhance authentication performance. With over 20 years of 3DS experience, a dedicated team of 3DS experts, and the highest levels of service in the industry, Arcot is the preferred global 3DS partner.
Contact Us
Arcot or sales.arcot@broadcom.com
