Article content
Will Visa’s New Merchant Fraud Monitoring Program Impact Your Business?
24.05.2023
6 min
As online transactions continue to grow in popularity, the likelihood of businesses encountering dishonest activity and cyber attacks also rises. To mitigate these risks, Visa, one of the world’s largest payment networks, has various measures in place, one of them being the Fraud Monitoring Program. Visa continuously issues updates on the VFMP to ensure it is well-fit to address current issues.
In one of its newest advisories, the payment industry giant announced the release of an extension of the VFMP - the Visa Digital Goods Merchant Fraud Monitoring Program. This comprehensive overview is here to provide you with all the necessary information on this initiative, from its applicability criteria and implementation timeline to its potential pros and cons.
What Is the VFMP All About?
Before you learn more about Visa’s new program, it’s essential for you to understand what the Visa Fraud Monitoring Program is.
VFMP’s aim is to track down merchants who receive excessive chargebacks with “fraud” reason codes. It operates as a compliance platform for merchants, ensuring that they adhere to the required standards. Any merchant who accepts Visa payments can potentially be inducted into this program.
Once a business is moved to the VFMP, Visa closely monitors its activities and conducts routine compliance reviews. If the merchant fails to reduce their fraud rate to an acceptable level, even after the VFMP term has expired, their bank account may be terminated, rendering them unable to process card transactions.
VFMP Vs. the Digital Goods Program - 3 Key Distinctions
While the Digital Goods program shares similarities with the core Visa Fraud Monitoring Program, it has some distinct characteristics, namely:
1. Targeted Merchants
The Digital Goods update is VFMP’s extension specifically designed for digital goods merchants. Unlike VFMP, which is applicable to all types of merchants, the new program is applicable only to merchants with specific Merchant Category Codes (MCCs), namely:
- MCC 5735 — Record Stores
- MCC 5815 — Digital Goods: Media (Books, Movies, Digital Artwork, Images, Music)
- MCC 5816 — Digital Goods: Games
- MCC 5817 — Digital Goods: Applications (excluding games)
- MCC 5818 — Digital Goods: Large Digital Goods Merchant
These businesses often face unique fraud challenges that are different from those encountered by physical merchants, such as unauthorized access issues or digital piracy, so the new program aims to address them by providing tailored solutions.
2. Non-Compliance Thresholds
Both the Visa Digital Goods Merchant Fraud Monitoring Program and the standard VFMP have defined thresholds as part of their fraud prevention processes. However, these limits still have significant differences - here is a comparison:
VFMP
The core Visa Fraud Monitoring Program features three threshold levels:
- Early Warning - $50,000 and 0.65% of sales value/month
- Standard - $75,000 and 0.9% of sales value/month
- Excessive - $250,000 and 1.8% of sales value/month
The Early Warning level is simply a notification advising the merchant to investigate the causes of the rising fraud level, while the Standard threshold marks the business’s enrolment in the VFMP. The Excessive level is reserved for high-risk merchants as well as those who breach the Standard threshold.
VFMP-Digital Goods:
The thresholds of Visa’s Digital Goods Merchant Fraud Monitoring Program are divided into two categories:
- Early Warning - $25,000, 300 fraud count, and 0.9% fraud sales ratio/month
- Standard - $15,000, 150 fraud count, and 0.45% fraud sales ratio/month
Overall, even though the threshold sum in dollars is lower in the VFMP-Digital Goods, the minimum transaction number provides merchants with some flexibility.
Moreover, the Digital Goods Merchant program doesn’t entail an Excessive level threshold. However, staying enrolled in the program for a longer period of time will result in higher fees. Depending on the duration of non-compliance, merchants may be forced to pay fees of up to $75,000 per month.
3. Approach to Chargebacks
While the VFMP can help merchants dispute chargebacks related to fraudulent transactions. The Digital Goods Merchant Fraud Monitoring Program, on the other hand, focuses on providing tools and resources to help merchants prevent chargebacks from occurring in the first place.
When Does the New Program Go into Full Effect?
The Visa Digital Goods Merchant Fraud Monitoring Program went into effect on
April 1, 2023. Before any non-compliance evaluations are imposed, a six-month advisory period is implemented until
August 31, 2023, to allow banks and merchants to familiarize themselves with the update.
Merchants and acquirers do not necessarily have to take any action during the advisory period. However, Visa recommends following these steps to prepare for the program:
- Acquirers should inform their merchants and third-party agents of the program’s implementation date and ensure that adequate risk controls are maintained before it becomes fully operational in September 2023.
- Acquirers must review the merchants’ business practices to ensure that their terms and conditions are disclosed properly to consumers and that their operations are compliant with the Visa network rules.
- Acquirers need to monitor the performance of digital goods merchants independently, aiming to prevent fraudulent activity from reaching or exceeding program thresholds.
Visa reserves the right to update its risk compliance programs as it deems necessary. Hence, it is advisable for merchants to keep track of program updates and adjust their course of action accordingly.
Can a Merchant Get Out of the New Program?
Just like with the VFMP, it’s possible to be removed from the Visa Digital Goods Merchant Fraud Monitoring Program. To exit the program, you must maintain a fraud rate below the acceptable threshold for three consecutive months. If you exceed the threshold again within two months, you’ll have to start over.
If, after 12 months into the program, you fail to bring your fraud rate under control, you may get disqualified. This means that Visa could prevent you from accepting Visa payments and ban you from the network. Given that it is the most widely-used card brand in North America and Europe, disqualification from the Visa network could have catastrophic consequences for your business.
Bottom Line: Main Pros & Cons of the VFMP’s Digital Goods Extension
Overall, from the perspective of a merchant selling digital goods, there are both positive and negative aspects to Visa’s new initiative.
On the positive side, the payment industry giant has finally recognized that digital goods merchants operate under unique circumstances compared to other types of businesses. The lack of such recognition has been a long-standing concern among merchants since VFMP’s introduction.
As digital goods often have a low price point, sometimes only a few dollars, it’s encouraging to see Visa taking a more specific approach to merchant categorization by implementing a minimum transaction amount for the program’s applicability.
However, the downside here is that, as of now, being labeled as a digital goods seller doesn’t necessarily mean that a business is less likely to end up in the VFMP than other types of merchants, which is far from ideal for any of the parties involved.
With that said, considering Visa’s innovative and forward-thinking approach, we are sure to see this initiative evolve with time and get updated as soon as more beneficial solutions are found.