Adyen Fraud & Excessive Charge-back Manual v 5.0

7/22/2019 Adyen Fraud & Excessive Charge-back Manual v 5.0

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Table of ContentsIntroduction.................................................................................................................................3

Audience..................................................................................................................................3Changelog...............................................................................................................................3

1 MasterCard and Visa Programs...............................................................................................42 MasterCard Excessive Chargeback Programme......................................................................53 MasterCard Global Merchant Audit Program .........................................................................74 Visa Global Merchant Chargeback Monitoring Programme.....................................................95 Visa Global Merchant Fraud Performance Program...............................................................116 Visa Regional Merchant Fraud Performance Program...........................................................137 Possible solutions..................................................................................................................14

7.1 Monitoring chargeback levels........................................................................................14

7.2 Defending chargebacks..................................................................................................157.3 AVS America & UK only................................................................................................157.4 3D Secure.......................................................................................................................157.5 Adyen Fraud settings.....................................................................................................16

8 Summary...............................................................................................................................18

2 Copyright Adyen B.V. 2012


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Introduction

Introduction

Adyen has recognised that fraud and chargebacks are becoming an ever increasingproblem for many merchants. For most merchants their fraud and chargeback problemswill be related. Adyen wants to warn merchant's of the potential implications if they haveexcessive fraud and chargeback rates, especially the possibility for fines to be levied toencourage the correction of the underlying fraud and chargeback problems. Adyen alsowants to work with its merchants to help them reduce their fraud and chargebackproblems.

This manual will outline:

the rules that govern both the MasterCard and Visa fraud and chargebackprograms;

the practicalities of the MasterCard and Visa fraud and chargeback programs;

the potential fines that can be levied if fraud and chargeback problems are notrectified in a timely fashion; and

possible solutions to stop fraudulent transactions before they occur.

Please note that each fraud and chargeback program is different and worksindependently of the others.

It is important to understand that Adyen does not always work directly with MasterCardand Visa in relation to the fraud and chargeback programs. In many cases Adyen workswith its Acquiring partners who then deal with MasterCard and Visa directly.

Fines in relation to the programs are levied by MasterCard and Visa to the Acquirer whowill then levy them to Adyen who will then levy them on the merchant.

The latest version of this document is available at:

https://support.adyen.com/links/documentation

Audience

This is an information manual for merchants, to provide them with sufficient informationto avoid issues and additional costs related to these fraud and chargeback programs.

Changelog

Version Date Changes

4.0 2011-10-20 Adjustment from internal manual to public information

5.0 2012-03-02 Adjustment from additional scheme information

Copyright Adyen B.V. 2012 3
https://support.adyen.com/links/documentationhttps://support.adyen.com/links/documentation


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MasterCard and Visa Programs

1 MasterCard and Visa Programs

The table set out below explains the five different MasterCard & Visa programsrelated to Fraud and/or Chargebacks:

Program Minimum Thresholds Potential Fines

MasterCardExcessiveChargeback Program

CTR in excess of.5%; and

at least 50 chargebacksin 1 calender month.

USD 25 per chargeback abovethe allowable threshold; and

A large Violation elementbased upon the Issuerrecovery element and basispoint score above theaccepted thresholds for thatmonth.

MasterCard GlobalMerchant AuditProgram

3 fraudulent transactions;and

At least USD 3,000 infraudulent transactions;and

A fraud to sales dollarvolume ratio minimum of3% and not exceeding

4.9%

USD 25,000 for not submittinga special merchant auditquestionnaire.

Visa Global MerchantChargebackMonitoring Program

the number of charge-backs in a single month ismore than 200; and

the ratio of thesechargebacks to themerchant's transactionsin the same month ismore than 2%.

USD 100 per chargeback USD 200 per chargeback if the

merchant has notimplemented procedures toreduce chargebacks (aftermonth 4)

Visa Global MerchantFraud Program

$25,000 of reportedfraud; and

25 fraud transactions;and

2.5% fraud-to-sales ratio

1st: USD 5,000

increased with an other USD5,000 for every month on orabove the performancethresholds

Visa RegionalMerchant FraudProgram

$15,000; and

15 fraud transactions;and

7,5% fraud to dollar salesratio

No financial penalty onlychargeback window



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MasterCard Excessive Chargeback Programme

2 MasterCard Excessive ChargebackProgramme

MasterCard closely monitors all chargebacks.

Every month, Adyen's acquiring partners track every merchant's MasterCardchargeback to transaction ratio (CTR). The CTR is the number of MasterCardchargebacks received by the acquirer for a merchant in a calender month, dividedby the number of the merchant's MasterCard sales transactions in the precedingmonth.

An example of the calculation and the formula can be seen below.

CTR = #of February Chargebacks# of January Settled Transactions

Chargeback Month February

# of February chargebacks 1000# of January settled transactions 50000

February CTR 2.00%

MasterCard monitors two types of merchant's as set out below:

Program Thresholds

Chargeback Monitored Merchant CTR in excess of .5%; and

at least 50 charge-backs in 1calender month.

Excessive Chargeback Merchant two consecutive calendar months(the trigger months) themerchant has a minimum CTR of1%; and

at least 50 chargebacks in eachmonth; and

this designation is maintaineduntil the merchant's CTR is below

1 % for two consecutive months



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Potential Fines

MasterCard will issue fines if a merchant is an Excessive Chargeback Merchant.The calculation of the MasterCard fine is formula driven and consists of twocomponents - an Issuer Recovery element ($25 per chargeback) and a Violationelement. The violation element is calculated after taking into account the IssuerRecovery element and the basis point score. We cannot give an exact figure onthis as each case will be different however the figure can be very large.



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3 MasterCard Global Merchant AuditProgramThe Global Merchant Audit Program uses a rolling six months of data to identifymerchants that in any calendar month meet the criteria set out in the table below.The fraud figures are related to when the transaction occurred not when thefraudulent transaction was reported.

The table set out below explains the different tiers of the MasterCards GlobalMerchant Audit Program.

A merchant location is classified inthe Following GMAP tier....

If in any calendar month, themerchant location meets thefollowing fraud criteria...

Tier 1 Information Fraud alert 3 fraudulent transactions; and At least USD 3,000 in fraudulent

transactions; and A fraud to sales dollar volume

ratio minimum of 3% and notexceeding 4.99%

Tier 2 Suggested Training alert 4 fraudulent transactions; and At least USD 4,000 in fraudulent

transactions; and a fraud to sales dollar volume

ratio minimum of 5% and notexceeding 7.99%

Tier 3 - High Fraud alert 5 fraudulent transactions; and At least USD 5,000 in fraudulent

transactions; and A fraud to sales dollar volume

ratio minimum of 8%.

If MasterCard identifies a merchant in Tier 2, Adyen will recommend the merchantundertakes a fraud training program.

If MasterCard identifies a merchant in tier 3, MasterCard will usually issue an auditof the merchant, this means:

1. The acquirer will require the merchant to fill in a questionare outlining what



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MasterCard Global Merchant Audit Program

steps it is taking to stop its fraud problem. The merchant must return thequestionare within 25 days after Adyen notifies the merchant. Adyen willliaise with its merchant's to ensure the questionaire is completed correctly;

and2. If MasterCard is not happy with the response then they will require the

merchant to create and implement a fraud control action plan within 90days of being placed in the Global Merchant Audit Program.

Longterm if the fraud issues of the merchant are not resolved by the fraud controlaction plan then the acquirer and / or MasterCard will open up a six monthchargeback window and possibly revoke the right for the merchant to acceptMasterCard payments.

Potential Fines

MasterCard does not supply details of specific fines however a continued violationwill fall under what MasterCard describes as Category A noncompliance.Category A noncompliance occurs when a merchant affects payment systemintegrity. MasterCard has the authority to impose monetary noncomplianceassessments for Category A noncompliance.



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MasterCard Global Merchant Audit Program

4 Visa Global Merchant ChargebackMonitoring Programme

Visa separetly monitors international and country-to-country chargebacks. Ainternational transaction is for example when a UK based merchant sells goods toa shopper with a French issued credit card. A country-to-country chargeback iswhen an UK merchant received a chargeback from a shopper with an UK issuedcard.

Visa Europe monitors International Transactions and Country-to-CountryTransactions to identify Merchants that generate excessive Chargebacks in

relation to these International Transactions and Country-to-Country Transactions.

Visa Europe measures the chargebacks received in a single month (irrespective ofthe date the actual transaction took place) against the transactions received inthe same month.

The formula and an example of a calculation are set out below:

CTR = #of January Chargebacks# of January Settled Transactions

Example Calculation Month

Chargeback Month January

# of January chargebacks 250

# of January transactions 7500

CTR 3.33%

Visa will place merchant's in their Excessive ChargeBack Program under two

criteria:

1. the number of chargebacks (international or country-to-country) in a singlemonth is more than 200; and

2. the ratio of these chargebacks to the merchant's sales (international orcountry -to-country) in the same month is more than 2%.

A merchant that has ben placed in the Global Merchant Chargeback MonitoringProgramme will be granted a 3 month remediation period to reduce excessivechargebacks (the remediation period is not applicable for high risk merchants).



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Visa Global Merchant Chargeback MonitoringProgramme

Potential Fines

When a merchant's CTR is above 2% then the potential Visa fine is between $100and $200 per chargeback (at Visa's discretion). Therefore, an appeal processexists when the circumstances of the excess are identified as well as themerchant's actions to correct the situation.

Note:

1. For the purposes of administering Merchant compliance under the Global MerchantChargeback Monitoring Program, if a merchant submits transactions for a single

Merchant location using multiple names, Visa Europe may group the Merchantactivity performed under the multiple names.

2. If Visa Europe determines that an Acquirer or its Merchant modified the Merchantname or Merchant data in any way to circumvent the Global Merchant ChargebackMonitoring Program, Visa Europe may:

Assess a fine of US $10,000 per Merchant, per month, to the Acquirer;

Permanently disqualify the Merchant and its principals from participating inthe Visa program.



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Visa Global Merchant Fraud Performance Program

5 Visa Global Merchant FraudPerformance Program

The Global Merchant Fraud Performance Program applies if a merchant is locatedin one region and a card is issued in another region. For example if a merchantwas located in Europe and the card was issued in Asia then this programme wouldapply.

There are two categories in the program as set out in the tables below.

Minimum Fraud Performance $25,000 of reported fraud; and

25 fraud transactions; and

2.5% fraud to sales ratio

Excessive Fraud Performance $250,000 of reported fraud; and 2.5% fraud to sales ratio

For merchant's who meet or exceed the minimum fraud performance thresholds,remediation consists of:

1. Workout period There is a three month workout period during which Adyenwill work with the merchant to remedy the fraud problem. No financialpenalties will be imposed at this time.

2. Enforcement Period If the merchant does not reduce fraud to below theaccepted thresholds, it can become liable for chargeback liability (if it isn'talready) and fines following the workout period. Continued non conpliancecan lead to the revoking of the merchants right to accept Visa payments.

For merchant's who meet or exceed the excessive fraud performance thresholds,

remediation consists of:

1. Workout period There is no workout period

2. Enforcement period Effective immediately, the merchant is subject tocharge-back liability for fraudulent transactions. In the beginning of monththree, fines are applied in addition to charge-back liability. Continued non-compliance can lead to the revocation of the right to accept Visa payments.



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Visa Global Merchant Fraud PerformanceProgram

Potential fines

Fines begin at $5,000 per month and increase by $5,000 increments for everymonth the merchant meets or exceeds the thresholds. Fines are applied in USDas set out in the table below:

1st fine $5,000.00

2nd fine $10,000.00

3rd fine $15,000.00



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Visa Global Merchant Fraud Performance Program

6 Visa Regional Merchant FraudPerformance ProgramThe Visa Regional Merchant Fraud Performance Program is separate from the VisaGlobal Merchant Fraud Performance Program. It only applies to transactions wherethe Card was Issued in the same region as the merchant is located (i.e EuropeanIssued card with a European located merchant).

The Programme parameters are set out below:

Workout Parameters $15,000.00


7,5% fraud to sales ratio

High Risk Parameters $40,000.00


20% fraud to sales ratio

For merchant's who meet or exceed the regional fraud performance thresholds,remediation consists of:

Workout period There is a three month workout period during which Adyen willwork with the merchant to remedy the fraud problem. No financial penalties willbe imposed at this time.

High Risk Period If the merchant does not reduce fraud to below the acceptedthresholds, it can become liable for chargeback liability (if it isn't already) and

fines following the workout period. Continued non conpliance can lead to therevoking of the merchants right to accept Visa payments.



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Visa Regional Merchant Fraud PerformanceProgram

7 Possible solutions

7.1 Monitoring chargeback levels

Many merchant's do not monitor their chargeback levels. It isimportant that merchant's realise there is a problem beforeMasterCard and Visa start levying fines. In the Adyen back office,merchant's have a real time view of all chargebacks they receive ifthey navigate to the Disputes section of their Adyen customer area.

Adyen is currently developing a tool so merchant's can accuratelyview their MasterCard and Visa CTR's in their Adyen customer area.

Merchant's can also receive an automatic email advising them ofwhen a chargeback is received. This email can be set up as set outbelow:

a) Login to the Adyen Customer Areab) Click on the "Settings" menuc) In the "System Messages" box click Edit System Mesage

d) Click the "New" button

Set fields as follows:

a) System Component: CHARGEBACKSb) Delivery Type: emailc) Click the "Add" button

To see the email address to which this email will be send to:

a) Loginb) Click "Settings" menuc) Click "My User" box

Your details are in the "User Contact Details" section. It is also here that you canadd or change the contact details of the person who will receive the automatedemail.



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Possible solutions

7.2 Defending chargebacks

Merchant's can most times defend chargebacks through their Adyencustomer area. They can click into each Dispute in the Disputessection of their Adyen back office. After clicking into a dispute their isa tool where merchant's can upload documentation to defend achargeback

Once uploaded this material gets passed on to our acquiring partnerswho pass it on to Mastercard and Visa. Examples of defence materialcan include extract logs, signed courier or delivery company docketsor invoices and emails or communcations from the shopper admittingthey received the goods.

7.3 AVS America & UK only

If a merchant provides goods or services to shoppers with USA or UKissued cards then we recommend that AVS is used at all times. AVS isstill not well implemented in other parts of Europe therefore we do notrecommend its use.

7.4 3D Secure

Adyen always recommends the use of 3D secure. Long term, Adyensees the use of 3D secure as a key way to stop fraud. 3D secure maylead to a higher refusal rate however will lower merchant's fraudrates. If a merchant's would like to test 3D Secure then Adyen canactivate it (very easily) for a test period and merchant's can thenanalyse their conversion rates during the test period. It is also veryeasy to de activate if you believe it is having a strong impact on yourconversion rates.

It is important to understand that even if a merchant has initiated 3Dsecure its fraud level will still be monitiored by the schemes. Although

it would not be receiving chargebacks and therefore cannot be anexcessive chargeback merchant it is possible (& has occurred) that amerchant with 3D Secure can be placed in the Visa & Mastercardfraud program.

There is an automatic liability shift to the issuing banks for personalcards once 3D secure has been initiated by a merchant, however if amerchant has excessive chargebacks and fraud then the schemesmay open up a six month window where the liability for chargebacksshifts from the MasterCard and Visa to the merchant.



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Possible solutions

7.5 Adyen Fraud settings

If you are a merchant with excessive fraud and chargeback levels please work

with your Adyen representative to perfect your Adyen fraud settings. Fraudsettings need to be different for each merchant's given their different businessmodels and payment methods.

1. Issuing card v different shopper country

Many fraudulent transactions occur with a differing shopper IP addressand Issuing card country. If a merchant has a high number offraudulent transactions Adyen recommends using this tool. It caneither be set to 100/100 which will block all transactions which have adiffering shopper country and issuing card country or if a merchanthas a number of legitimate transactions from differing shopper andissuing card countries then we also recommend setting the check at90 and manually filtering the transactions. Manually filterting meansmerchants manually checking a transaction and refunding any that itbelieves to be fraudulent. This means a merchant will not incurchargeback costs if it has chargeback liability. Adyen is developing ona tool which will stop transactions that reach a certain score and thenmerchant's can decide whether they would like to refuse or authorisethe transaction.

2. Issuing card country

If a merchant notices a high number of fraudulent transactions fromcards issued in one country then they can block cards issued in thatcountry. For example, the highest percentage of fraud comes fromUSA issued cards. If after carrying out analysis merchants discoverthey do not have shoppers buying with USA issued cards then theycan put USA on the Issuing Country Referral List which is located oneach merchant's fraud settings. This may affect shoppers who live inEurope but hold a USA issued card however from our experience thisis usually a very low percentage of shoppers.

3. High Risk Shopper Country

If a merchant has a number of fraudulent transactions from oneShopper country than they can block all transactions from thoseshopper countries via the Shopper IP originates from high-risk countryblock located on their Adyen fraud tool.



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Possible solutions

4. Velocity Checks

Velocity checks are efficient at stopping fraudulent transactions as if afraudster is successful in one transaction through a merchant they willusually try and repeat the procee. For some merchant's, velocitychecks would not be suitable as legitimate transactions may bestopped (this would occur when shoppers frequently buy items orsubscriptions through a merchant each day). However, whenshopper's would only usually buy goods throug a merchant veryinfrequently then they are very helpful in stopping fraudulenttransactions. If for example a merchant would only usually buy goodsonce a day or once a week then Adyen advises strengthening thevelocity checks. If you don't understand what a velocity check is then

a merchant's Adyen representative can explain it and work with themto perfect these settings.



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Possible solutions

8 Summary

Adyen will always work with its merchants to decrease their fraud and chargebacklevels, however merchant's must constantly monitor their fraud and chargebacklevels and adapt their fraud settings and business practices accordingly to ensurefraud and chargeback levels are reduced.

If merchant's ever want further clarification on any issue related to fraud or chargebacksthen they should contact their Adyen representative who will provide further clarification.


Documents

Adyen Fraud & Excessive Charge-back Manual v 5.0