Chargebacks can harm your business in a number of ways, including with a chargeback fee that can range from $20 to $100 per claim. It’s estimated that one of the leading causes of chargebacks is fraudulent activity, with fraud accounting for 34% of all chargebacks.
As a result, businesses are seeking solutions to minimize financial loss and maintain consumer trust. One such option is 3D Secure, an authentication protocol that is designed to add an extra layer of protection for online transactions. Read on to discover key considerations for using 3D Secure to prevent chargebacks stemming from true fraud and learn how to effectively protect your revenue.
What are True Fraud Chargebacks?
True fraud chargebacks are transaction disputes filed by customers to get fraudulent credit card charges reversed. This involves bad actors using stolen credit card information to make purchases. The transaction is later discovered by the legitimate cardholders, who then file chargebacks. In these cases, merchants struggle to prove whether the customer authorized the transactions and frequently loses the dispute.
What is 3D Secure?
3D Secure (3DS) is an authentication protocol designed to enhance the security of online transactions. It adds an additional verification step to ensure the legitimacy of a transaction before it’s processed. Think of it like a deadlock on a door—it’s one extra barrier that bad actors have to get through to access your property.
3 Ways 3D Secure Can Reduce True Fraud Chargebacks
So how can you use 3D Secure to reduce true fraud chargebacks? At its core, it verifies the cardholder’s identity during the transaction. Here’s a more in-depth look at what’s involved in the process:
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Authentication Process
The 3D Secure chargeback framework adds verification steps such as requesting a password, biometric data, or a code sent directly to the cardholder’s phone. This makes it easy for customers to verify their identity.
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Risk-Based Authentication
3DS goes a step beyond other protocols, implementing what’s known as risk-based authentication, which allows low-risk transactions to bypass additional steps. For example, if a customer frequently shops from the same device or IP address, the system might allow them to proceed with a purchase without the added steps.
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Issuer and Merchant Responsibilities
With 3DS, card issuers are responsible for setting up and managing authentication prompts, making sure cardholders verify their identities during high-risk transactions. Merchants integrate 3DS into their checkout systems to boost security and reduce fraud without compromising the customer experience.
What are the Benefits of 3D Secure?
The extra layer of authentication reduces true fraud and provides greater security for both consumers and merchants, ultimately creating a safer and more reliable e-commerce environment.
Let’s take a closer look at how the process benefits both merchants and consumers:
- Enhances Fraud Protection: 3DS plays a crucial role in preventing unauthorized transactions by verifying the cardholder’s identity. This additional authentication step makes it significantly more difficult for fraudsters to use stolen card information, reducing the overall incidence of fraud in online purchases.
- Increases Customer Confidence: With 3DS in place, customers can shop online with greater peace of mind. Knowing that their transactions are protected by an additional layer of security encourages consumers to make more online purchases and fosters trust in digital platforms.
- Liability Shift Protection: One of the most significant advantages for merchants is the potential shift in liability. When 3DS is properly implemented, the liability for fraudulent transactions can move from the merchant to the card issuer. This transfer of responsibility can substantially reduce the financial risk associated with fraudulent activities for businesses.
- Helps With Regulatory Compliance: For merchants operating in the European Union, implementing 3D Secure 2.0 is particularly important. It helps businesses comply with the Strong Customer Authentication (SCA) requirement mandated by the Payment Services Directive 2 (PSD2). This ensures that merchants can continue to operate within the legal framework of their region while providing enhanced security for their customers.
The advantages of tackling your chargeback risks is well-illustrated by the case of ChowNow. The online food ordering platform’s losses from chargebacks grew to 1% of revenue, and the company considered hiring a full-time team to solve the problem. But ChowNow chose Sift instead and saw its chargeback rate drop by 99%. Employee time spent on fraud management fell to 15 hours a week, and the company saved $1 million.
Challenges and Considerations When Implementing 3D Secure
While 3D Secure offers numerous benefits, it’s far from a magic bullet, and the implementation process is not without challenges, including:
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Low Adoption Rates
Not all cardholders are enrolled automatically. Many choose whether to opt in to 3D Secure programs like Verified by Visa. And despite the improvements that have been made to 3DS, only a small percentage of global transactions currently use the latest version, limiting its overall impact.
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User Experience Concerns
3DS adds an extra step to the checkout process, which can lead to higher cart abandonment rates if not implemented correctly. What’s more, poorly integrated 3DS systems can cause delays and frustration and negatively impact the customer experience.
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Cost of Implementation
Implementation cost varies based on a number of factors, but it typically requires a significant upfront investment, both in technology and the integration process itself.
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Limited Protection
Although 3D Secure offers robust protection against fraud, it tends to leave other underlying causes of chargebacks, such as customer disputes or processing errors, unaddressed. Also, 3DS doesn’t cover chargebacks resulting from issues related to delayed shipping, product quality disputes, or incorrect billing.
The bottom line is that over-reliance on 3DS can provide a false sense of security. Chargebacks are a multifaceted issue with multiple root causes, and by focusing too much on one element, businesses may overlook others.
Why Sift is the Best Solution for Reducing Chargebacks
Reducing chargebacks is vital for maintaining a healthy digital business, and 3D Secure (3DS) can play a significant role in this process by adding an extra layer of authentication. However, while 3DS is a valuable tool, it’s not a foolproof solution against chargebacks. Fraudsters can still find ways to circumvent 3DS, and legitimate customers may initiate chargebacks for reasons unrelated to fraud, such as dissatisfaction with a product or service.
This is where Sift’s comprehensive fraud prevention solution comes into play, offering a more robust and adaptable approach to both fraud prevention and chargeback reduction.
How Sift Enhances 3DS Efficiency
While 3DS is particularly useful for high-risk transactions, it can introduce unnecessary friction and cost for the vast majority of low-risk users. With Sift, businesses can assess the fraud risk of each transaction in real time, enabling selective 3DS checks only for the riskiest customers. This targeted approach not only increases conversion rates by reducing friction for low-risk users, but also lowers costs by replacing a significant portion of 3DS checks with less expensive Risk-Based Authentications (RBA) via Sift.
In addition to optimizing 3DS, Sift offers a suite of advanced tools designed to protect businesses against various types of fraud and minimize chargebacks, including:
- Machine learning-powered risk assessment
- Real-time transaction monitoring
- Device fingerprinting
- Behavioral analysis
- Customizable rules engine
- Chargeback management tools
- Integration with multiple data sources for enhanced decision-making
- User-friendly dashboard for easy monitoring and analytics
By leveraging these features, Sift provides businesses with a powerful suite of tools to combat fraud and reduce chargebacks. The platform’s advanced algorithms automatically detect and prevent fraudulent transactions before they can impact your bottom line. Meanwhile, Sift’s sophisticated risk assessment capabilities help reduce false positives, ensuring that legitimate transactions aren’t wrongly declined, thus preserving valuable customer relationships and revenue.
One of Sift’s key strengths is its ability to adapt to new and evolving fraud patterns in real time. As fraudsters continually develop new tactics, Sift’s machine learning models continuously update, keeping your defenses strong. When chargebacks do occur, Sift streamlines the dispute process, providing you with the data and tools needed to efficiently challenge illegitimate claims.
With Sift’s comprehensive approach to fraud prevention and chargeback reduction, your team can focus on growing your business into a more secure and profitable e-commerce operation.
Ready to get started? Learn more and see how Sift can complement your 3DS protocols and drastically lower chargebacks.
