Payer Authentication Tools - Can They Slay the Chargeback Monster?

The Association of Payment Clearing Services reported this week that fraudulent "card not present" transactions increased by 68 percent from 2002 to 2003. Roughly £45 million was lost due to the chargebacks in 2003, with the biggest losses, £6.9 million, coming from the online gambling sector.

"This has got to be the single most significant 'event' in the history of e-commerce acquiring."

- Andrea Wilson
First Atlantic Commerce Ltd.

The snowballing problem is in need of a remedy, and Andrea Wilson, CEO of First Atlantic Commerce Ltd., believes the answer lies in payer authentication systems already in existence, specifically Verified by Visa and SecureCode Solutions by MasterCard.

Wilson believes the programs--both of which are offered through First Atlantic Commerce's 3D Secure payer authentication solution--could eliminate nearly 80 percent of online gambling merchants' chargebacks.

This would be great news for an industry that has been cut off by U.S. banking institutions through policies that many in the industry believe are a result of high chargeback rates.

Wilson said the two programs mark "the first time in the history of Internet business that the card associations have provided chargeback liability protection to acquiring banks and merchants."

She added, "[For] all those credit card transactions that get disputed, the merchant now has a safety net," she said. "As soon as they make an attempt to verify the card, the merchant is cleared of all chargeback liability."

Both programs were designed to enable the merchant and acquiring bank to implement procedures ensuring that the cardholder is the one making the payment, even online.

"Just like for a transaction in person, they are supposed to verify the signature with the person that is presenting the card; there are now steps that online merchants can take to protect themselves from fraud," Wilson said.

Payer authentication enables all parties in an online transaction to transmit confidential and valid payment data, and provides verification to the merchant that the buyer is the authorized owner of a particular card account, Wilson explained. A valid and approved authentication also helps to confirm the minimum age criteria of the cardholder or guarantor for those transactions that are restricted to consumers over the age of 18.

The programs have remained largely under the e-commerce radar screen, particularly in the I-gaming space. Wilson said many e-commerce business don't realize that the system is open to any merchant, regardless of what their merchant code is or their past history of chargebacks. The only stipulation is that acquirer has to be enrolled with VISA or MasterCard as well.

One payment processing expert suggests, however, that this stipulation is precisely why such programs will not catch on in the I-gaming space.

"Visa has stated that they are not going to certify any gaming sites for the (Verified) program," the expert, who spoke on the condition of anonymity, said. "Actually the quote was, 'It will be business as usual as far as gaming is concerned.'"

Thus, he said, Verified by Visa doesn't apply to all merchants.

Wilson pointed out, however, that, "Visa and MasterCard do not discriminate who can participate in the programs. They are actually encouraging all banks and merchants to adopt the service. The MCC code is not reflected in the authentication messages and is not registered with the merchant."

"The technology is pretty interesting, and if it delivers, it could solve some problems."

- Scott White
Dot Com Entertainment Group

As the president of Dot Com Entertainment Group (DCEG), a software supplier to the interactive gaming industry, Scott White has seen his licensees struggle with payment and credit card issues for the better part of the last three years.

White said he has had a running dialogue with First Atlantic Commerce and that the programs by Visa and MasterCard could enable DCEG to offer a valuable added service to licensees.

"We aren't in the transaction business, but this could be something we could implement for our licensees," he said. "The technology is pretty interesting, and if it delivers, it could solve some problems."

White said the system would have to achieve mass penetration in the I-gaming space for it to be truly effective.

"If they could get everyone in the e-commerce sector to play ball, it could go a long way," he said. "It doesn't address the issuing of cards being blocked, and that is our biggest concern, but it at starts the shift the process in the right direction."

Wilson's main objective is spreading the word to as many e-commerce merchants, both in and out of the I-gaming space, as possible.

According to MasterCard's statistics, only 2,558 issuing banks were enrolled in SecureCode at the start of March. The vast majority of these banks, 2,464, are based in North America. Meanwhile, 129 acquirers were taking part in the program.

Verified By Visa's enrollment is low as well. According to Credit Card Management, as of December, there were 9,000 issuers enrolled in the system under the Visa USA umbrella, which has 14,000 issuing banks. Nearly 2 million cardholders participate in the Visa program in North America alone.

The bottom line is that few in the e-commerce sector are signing up, and Wilson argues that his because of a general lack of knowledge, as well as the sentiment among some merchants (especially in the I-gaming space) that the credit card companies are against them.

"The more we spread the word about this service, the more uptake there will be by merchants," she said. "This has got to be the single most significant 'event' in the history of e-commerce acquiring."

At the time of publishing, both MasterCard and Visa declined to comment on their payer authentication programs' value and/or availability to the I-gaming industry.