The lack of trust in cross-border eCommerce, peer-to-peer (P2P) commerce and online marketplaces is the leading cause of friction between buyers and sellers all around the world. Fraud, ineffective payment solutions, the lack of buyer-seller protections and costly mediation functions are major hurdles to seamless business exchanges. Cybercrime is especially on the rise with rampant chargeback fraud, merchant identity fraud and triangulation schemes as described below.

Chargeback fraud

This type of fraud occurs when a customer files a dispute with his/her credit card issuer expecting that a payment will be reversed. They usually forgo contacting the merchant directly to handle the return, assuming that the credit card company will solve their complaint quicker. While the dispute is investigated, funds are withheld from the merchant’s account, adding to the labor-intensive and costly process.

A chargeback can occur for a number of reasons:

A product or service was returned, but a refund was never issued.

A product or service was not delivered.

A purchase was never made.

A transaction was claimed to be unauthorized.

An order was cancelled, but it was still sent.

Merchant identity fraud

In this scheme, a criminal sets up a merchant website as if it were a legitimate business and charges stolen credit cards. When the cardholder discovers the unauthorized payments, a chargeback is requested and the card issuer becomes liable for the loss.

Triangulation scheme

A crime in which a fraudster purchases an item from a merchant using a stolen credit card and sells it on a website like eBay. The product is sold to an unsuspecting third party and payment is received. In this scenario, the original merchant inadvertently receives a fraudulent payment and may incur a chargeback in the process.

Beyond fraud, ineffective payment solutions are also roadblocks to effective cross-border ecommerce. They are characterized by low approval rates, particularly for the 2.5bn people living in the developing world today. False positives are also quite common as buyers are flagged on the suspicion of fraud when the transaction is veritably legitimate. This contributes to revenue loss while turning away well-meaning customers. To compound the issue, many local payment methods are unavailable to consumers around the globe, leading to high fees that are paid to third party financial intermediaries responsible for authorizing, clearing and settling digital payments.

On the spectrum of P2P offerings, service providers like Paypal have dispute resolution processes in place, while other P2P platforms like Venmo do not offer buyer-seller protections. Such networks fail to account for nonconforming or undelivered goods and services, although their money handling procedures are effective. As such, they are not complete payments solutions and are not suited to accommodate P2P commerce involving parties that do not know each other and may never transact again.

In online marketplaces, the long-tail distribution of merchants results in the need for marketplaces to internalize costly mediation functions normally administered by the card networks, which in turn drives up product fees. This isn’t a problem for large, established marketplaces that have the scale to internalize these functions. However, smaller marketplaces are often unable to handle mediation functions and are consequently unable to offer payments solutions.

To combat these issues, blockchain-based payment networks like COTI are paving the way for streamlined exchanges. In such systems, transactions are guaranteed by cryptographic proof rather than trusted third-party intermediaries. Because blockchains are impenetrable, payments using this underlying technology will be foolproof against fraud and chargebacks. Costs will also be substantially lower as third parties are not involved to verify and confirm the transaction. This will open up more exchanges across the world as sellers can achieve high approval rates by ensuring that every consumer with the capacity to pay is able to complete purchases.

COTI’s Trust Scoring engine and mediation system also serve to drive down costs. Users of the COTI network pay variable fees depending on their risk profiles, with highly-trusted users paying low-to-zero fees and users with higher risk profiles paying higher fees. The mediation system helps account for typical situations that require mediation like nonconforming or undelivered goods and services, unauthorized charges and billing errors.

By harnessing the power of a decentralized collective of mediators, merchants will be better equipped against fraudulent chargebacks. The Trust Scoring engine will further contribute to the healthy functioning of the COTI network, as users exhibiting dishonest conduct will be disincentivized with lower Trust Scores and higher fees.