Can 3D Secure Lower Chargeback Ratios?
by Sorin Despot
Yes, it can, and it does. There is no actual need to read the rest of the article, unless you want to get a better grip on the underlying notions, processes and overall benefits of adopting the 3D Secure protocol.
Still here? OK, if you insist:
What Are Chargebacks?
A chargeback is the reimbursement of funds to a consumer, initiated by the issuing bank. Chargebacks are a form of consumer-centric protection against fraud or other mishappenings either on the merchant’s side or due to third-party intervention. Simply put, chargebacks are transaction reversals, triggered by card-issuing banks to reimburse consumers in case of fraudulent or disputed transactions.
One common misconception is to equate chargebacks with refunds. The main difference between the two is WHO initiates the transaction reversal. In the case of chargebacks, the trigger is pulled by the issuing bank, at the cardholder's request, and implies a significantly high fee. In the case of refunds, the merchant directly settles the reimbursement of funds to the client, and no extra fees are entailed.
What Is 3D Secure?
3D Secure is an XML-based protocol developed to add an extra layer of security for online debit and credit card transactions. Visa was the first card provider to implement the protocol, with the intention of improving online-payment security. 3D Secure is now offered to Visa customers under the name “Verified by Visa.” MasterCard SecureCode is another implementation of the same 3D Secure protocol.
There are precisely three parties that are involved in the 3D Secure process:
- The e-merchant
- The acquiring bank
- The card issuer (VISA and MasterCard)
In broad terms, 3D Secure is a fraud prevention scheme that adds an extra authentication step for online payments. As far as companies are concerned, at a fundamental level, 3D Secure offers liability cover for transactions, providing additional protection against fraud and money-laundering schemes.
How Does 3D Secure Work?
Stripped down to its essentials, the 3D Secure protocol follows the next few steps:
- The cardholder enters her card information in the payment page - the 16 digit card number, the expiry date and the CVV/CVC three-digit number;
- The payment gateway contacts a directory server to assess whether or not the card is enrolled in the 3D Secure program;
- If the card is listed, the payment gateway redirects the cardholder to a 3D Secure page hosted by the issuing bank;
- The cardholder enters a one-time PIN (OTP) or password to authenticate herself to the issuing bank on the 3D Secure page;
- The result of the authentication process is returned to the payment gateway;
- The payment gateway submits the card information and the 3D Secure authentication result to the acquiring bank;
- The acquiring bank authorizes or holds back the transaction, and the cardholder is notified of the success or failure of her purchase.
Amazingly, once the cardholder makes that decisive click, the information chain is navigated and then quickly backtracked within three seconds.
The Benefits of Implementing 3D Secure
There have been voices to object against the 3D Secure protocol, mainly because it adds an extra step at the end of the customer's journey. I suppose that one extra step added to the user experience might have an impact on the e-store's conversion rates, but I could not find one definitive piece of evidence to shoulder this supposition.
That said, here are the main three benefits of implementing 3D Secure:
1. Set Up Is a Breeze
Setting up 3D Secure is truly easy and starts with a simple request submitted to your acquiring bank. Along your acquiring partner and payment gateway you can set custom rules to automatically validate cards registered with 3D Secure.
2. Zero Set up Costs
Adding 3D Secure to your payment solution entails no extra costs. Some acquiring banks may issue a charge to add the protocol to your merchant account. Nonetheless, in this specific case, transaction charges usually lower as a result of using 3D Secure.
3. Significant Liability Shift
The critical benefit brought on by the 3D Secure scheme is a liability shift for a successfully verified transaction. As the card issuers (Visa, MasterCard) assume part of the liability, the 3D-verified transaction offers protection against chargebacks. In any case, merchants should confirm with their acquiring bank to establish the exact terms of the liability shift.
Let's Wrap Up!
Implementing 3D Secure will not guarantee merchants a no-chargeback record and, in calculating the risk associated with individual merchants, payment service providers will continue to take chargeback ratios into account.
So, apart from implementing 3D Secure, keeping a good, open relationship with customers and handling all disputed transactions themselves will bring merchants better processing rates and additional benefits from the payment service provider.