In the late 1990s, card payments entered a new era with the internet's mainstream adoption. Traditionally, cardholders would swipe or dip their cards into a point-of-sale (POS) terminal in-store. This allowed some form of authentication to be carried out: the cardholder could enter a PIN into the POS terminal, or the merchant could compare the card's signature to the one present on their ID. However, the rise of e-commerce introduced card-not-present (CNP) transactions, where cardholders enter their details online without a physical interaction. This made it impossible for merchants to carry out in-person forms of authentication.
One factor that likely encouraged consumers to embrace online card payments was the protection offered by the Zero Liability policy. This ensured that cardholders were not held responsible for unauthorized charges should the card be used fraudulently, or the goods arrive incomplete or not at all. If an issue arises, consumers can initiate a chargeback process, requiring the merchant to prove that goods were delivered, and that the transaction complied with all relevant rules and regulations to avoid liability. Under certain circumstances, the liability for a fraudulent transaction will shift from the merchant to the card-issuing bank (a so-called liability shift). However, it is important to note that regardless of who is ultimately held liable, managing the chargeback process costs the issuer an average of $37 per transaction.
Recently, there has been a notable increase in transaction disputes. In 2023, U.S. consumers disputed approximately 105 million charges worth an estimated $11 billion, with this number expected to rise by 40% by 2026. This surge can partly be attributed to the increasing simplicity of disputing transactions. 36% of US consumers view the ability to dispute charges in their mobile banking app as “extremely valuable.” This, alongside growing customer awareness of consumer rights, influenced by financial influencers ("finfluencers"), meant that banks had to simplify this process in order to remain competitive.
A significant portion of these disputes, around 86%, are categorized as friendly fraud, where legitimate transactions are mistakenly or intentionally contested by cardholders. To counter this, various initiatives have been implemented across the payment ecosystem. For instance, Mastercard has developed an AI-based solution that analyzes multiple data points to identify potential friendly fraud. If the AI analysis indicates that a dispute is likely to be friendly fraud, the card issuer then presents the data to the cardholder, allowing them to cancel their claim. Similarly, Visa has expanded the list of compelling evidence that a merchant can submit, helping merchants to build a stronger case against potential friendly fraud.
The chargeback process is a huge expense for issuers. In 2023 alone, there were 105 million chargebacks. This, multiplied by the average of $37 per chargeback, would result in a cost of almost $4 billion for US issuers.
Thus, it is important for banks to find effective solutions to combat both friendly and malicious fraud in order to remain competitive. A promising solution is technology that enables consumers to authenticate their online purchases by tapping their credit or debit card to their smartphone. This method prevents fraudulent transactions, as malicious fraudsters cannot complete an online payment unless they are in possession of the physical card itself (much like how they cannot pay in a physical store without the card). Similarly, friendly fraudsters would find it difficult to dispute transactions they verified by tapping their own card (just as they would struggle to contest a purchase made in person). This approach demonstrates how credit and debit cards can be leveraged beyond payments, enhancing security and convenience for consumers, banks, and merchants alike.
A card can do so much more.
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