In response to the growing threat of first-party misuse, also known as friendly fraud, Mastercard is introducing a new program called First-Party Trust. Similar to Visa’s CE3.0, this initiative is aimed at providing enhanced transaction transparency to combat fraudulent chargebacks.
The Rising Threat of First-Party Misuse
First-party misuse presents a significant challenge for businesses of all sizes. Unlike traditional forms of fraud where criminals steal cardholder identities to make unauthorized purchases (third-party fraud), first-party misuse involves cardholders disputing legitimate transactions they themselves initiated. This can occur for various reasons, ranging from genuine mistakes such as forgetting about a purchase to intentional disputes driven by buyer's remorse or attempts to obtain goods or services for free.
The impact of first-party misuse is profound. Merchants often find themselves caught in a complex and costly chargeback process, where they bear the burden of proving the legitimacy of disputed transactions. Not only does this result in financial losses from chargeback fees and lost revenue, but it also consumes valuable time and resources that could be better utilized elsewhere within the business.
Furthermore, the current mechanisms for detecting and combating first-party misuse are inadequate. Traditional fraud prevention measures, such as authentication solutions designed to identify potentially fraudulent transactions, are ill-suited to address friendly fraud.
What is Mastercard First-Party Trust?
Mastercard's First-Party Trust program is an effort to address the challenges posed by first-party misuse and enhance transaction integrity in the digital payments landscape. At its core, the program aims to create greater transparency in transactions by enabling merchants to share enhanced data with issuers, thereby facilitating more informed decision-making in dispute resolution processes.
By providing merchants with the opportunity to submit pertinent transaction data, First-Party Trust enables greater visibility into the transaction lifecycle. This includes details such as device identity, delivery information, and additional identity factors, which can help distinguish genuine transactions from fraudulent ones.
One of the key benefits of First-Party Trust is its ability to streamline the dispute resolution process for merchants and issuers. By providing issuers with comprehensive transaction data upfront, the program minimizes the need for manual review and enables quicker resolution of disputes. This not only reduces the financial burden on merchants but also enhances the overall efficiency of the dispute resolution process.
How First-Party Trust Works
Mastercard's First Party Trust can be used either during the initial transaction or when a dispute is raised by a customer. In either case, the merchant must have a system in place for sending additional transaction details through the network.
During the initial transaction, this additional transaction information can be sent by the merchant’s fraud detection software provider. Only a few providers will have this capability initially, but more are sure to join them if there is sufficient demand from merchants for this capability.
Merchants interested in participating in the pre-dispute aspect of First Party Trust must first enroll in Ethoca Consumer Clarity.
This serves as a secure channel for merchants to share enhanced transaction data with issuing banks whenever a cardholder initiates a dispute. First Party Trust will use this existing channel to allow merchants to submit the required transaction details.
The specific requirements surrounding the transaction data to be submitted have not yet been officially confirmed by Mastercard, but most expect it to be similar to Visa’s CE3.0. This would mean submitting two prior undisputed transactions with multiple matching data points that confirm the cardholder’s identity. These could include:
- IP address
- Device ID
- Device fingerprint
- Device location
- Shipping address
- Billing address
- Login credentials
For the moment, this is still speculation, but we’ll keep you informed when we have more detailed information.
What Impact Will First-Party Trust Have?
First-Party Trust is expected to roll out sometime in September, but what impact will it have for merchants? Clearly the closest comparison is with Visa CE3.0, which merchants have had mixed results with.
Some businesses, especially those with large numbers of repeat customers who later dispute charges, have found it helpful in preventing or reversing a significant number of chargebacks. In particular, Wells Fargo has stated that the number of disputes deflected was 130% greater than the number of disputes they previously won in representment.
On the other hand, many merchants have viewed CE3.0 as a disappointment. With the strict requirements for matching transactions, previous purchases by the same customer can still fail to qualify. And many merchants simply won’t have two previous transactions from a customer within the required time frame.
Despite the promising potential of the First Party Trust program, merchants, processors, and others in the payments industry still have questions and uncertainties about its implementation, integration, and effectiveness. In the coming months, many of these questions are likely to be answered. Ongoing collaboration between Mastercard, merchants, processors, and other industry stakeholders will be essential in addressing concerns, refining the program, and maximizing its effectiveness in combating first-party misuse.
