The advent and acceleration of ecommerce has impacted every player in the financial landscape. Traditionally, payments placed without the consumer present have put a strain on merchants, who, in such cases, are typically liable for any fraud. Merchants have begun to complain to the networks, who have started to listen. They’ve started to switch their mentality, putting the onus on the bank issuers to assume fraud liability.
Yitz came on the Payments Innovation podcast to share how “Card Not Present” is becoming “Remote Commerce,” and how that shift impacts every perspective in the financial landscape.
The main pain point for merchants: fraud liability
Originally, PAAY was centered on making frictionless consumer payments. Essentially, Yitz thought that paying for an item online should be simpler and more secure than making a credit card payment at a grocery store. But, soon, Yitz realized something:
Friction is not the major transaction pain point for merchants.
Rather, the major issue for ecommerce merchants is Card Not Present transactions, because these transactions require the merchant to assume liability for any fraud. Here’s what Yitz started hearing from merchants when he originally started PAAY:
“If you can solve the liability created because of Card Not Present transactions, we are interested.”
So, Yitz began a journey to do just that. Here’s what he found:
The whole premise of Card Not Present policies began about 60 years ago. Typically, liability is on the card issuer (the banks), but credit card networks wanted to discourage merchants from accepting payments whenever the consumer wasn’t present — situations that, 60 years ago, were much rarer, and usually meant a mail-in or over-the-phone catalog sale.
So, networks made a policy: if a merchant did accept payment without the consumer being present, they would have to assume the liability for said transaction in case of fraud.
But the original Card Not Present policies weren’t written for the ecommerce age.
And, a major problem in ecommerce payments arises for merchants in the form of friendly fraud.
How friendly fraud impacts the financial landscape
In tandem with ecommerce, so-called friendly fraud has been on the uptick: These are simply purchases the consumer says “I did not make,” but, in fact, they did. Essentially, by hiding behind a keyboard, consumers began to rapidly lie about purchases to recover the money paid for the items.
Merchants in these cases, because of the Card Not Present rule, have typically been liable for 100% of this fraud. Their liability will only continue increase, as purchases are now made over voice, mobile, and IOT transactions, all of which would be susceptible to the Card Not Present policies, forcing merchants to take on further liability..
Merchants have started to complain about the uptick in friendly fraud and their assumption of liability, and, thankfully, networks have heard them.
Networks are creating various new policies to benefit merchants
EMVCo is the governing body that determines the rules and protocols for credit card usage across the financial landscape; it’s equally owned by the 6 major credit card networks.
Recently, EMVCo has started re-writing the spec docs to rebrand Card Not Present to Remote Commerce — understanding that over the next 5 years, remote commerce transactions will actually exceed in-store transactions.
EMVCo is now building out the specs, protocols, and the full infrastructure for ecommerce. Yes, it’s late — we are now 30 years into e-commerce — but these new standards are designed to better protect the merchants, which will be a welcome change.
The changes include: a new EMV 3DS protocol, enabling frictionless consumer authentication, and adding in tokenization and other protocols to ensure faster, more secure transactions.
But here’s the kicker for merchants: With all these new updates, networks are shifting liability back to the issuers, and away from the merchants. Ultimately, Yitz said, the credit card networks want the issuers to push back on the cardholders in the case of friendly fraud.
With these new policies, hopefully, as ecommerce begins to expand and overtake brick-and-mortar sales, merchants will find it easier to transact directly with consumers, benefitting the entire payments ecosystem.
Until next time!