The transaction dispute process is broken. Introduced over 40 years ago, it has not evolved to keep pace with advances in payments and technology. This has created an environment that allows fraudsters to match or exceed technological advances in chargeback fraud.
What has also developed is an increase in confusion experienced by consumers who do not know where to turn when they have a problem with their transaction. This is due in part to unanticipated disconnects in e-commerce, neglecting the need for merchants to develop direct relationships with consumers.
Merchants and issuers are all too aware that the chargeback process is flawed. To make significant changes, merchants, issuers and consumers must collaborate to solve problems. This level of collaboration is indeed possible with solutions that enable each party to share information at critical stages that can reduce the volume of transaction disputes.
How the Broken Chargeback Process Works
Many merchants don’t have a clear understanding of how the chargeback process works. These points illustrate a typical dispute:
- The consumer files a dispute directly with the issuer. Frequently, the merchant is not contacted and has no way to address or fix the problem.
- The issuer does not have enough information about the transaction to resolve the issue. The typical option is to start the chargeback process and give the consumer a provisional refund.
- The acquirer debits the merchant’s account for the amount of purchase. This may include fees or fines.
- The card association processes the dispute, assuming that it’s valid. Their immediate concern is keeping the consumer happy.
- Often left out of the dispute process entirely, the merchant is notified of the chargeback and absorbs a fee.
- The merchant can file a chargeback representment but has very limited time to collect the necessary data on the dispute. This can result in further losses.
With little or no visibility during the chargeback process, costs can quickly add up for the merchant. The sooner the dispute is resolved, the better for everyone, including the consumer.
In the current process, the merchant lacks the opportunity to resolve the dispute directly with the consumer, and the issuer has no access to merchant and transaction information to address the problem effectively. Perhaps worst of all, the consumer becomes frustrated with the protracted length of the process and becomes disenchanted with both the merchant and issuer. This results in decreased patronage for the merchant, and a decrease in card usage – compounding loss of revenue for both parties.
What Drives Chargebacks?
Chargebacks can be the result of intentional or unintentional fraud with several factors contributing to the problem.
- Billing descriptor confusion. The 25-character limit on credit card statements doesn’t provide merchants with enough space to include purchase description. Also, consumers forget about purchases they’ve made or don’t recognize the merchant’s name.
- Intentional friendly fraud. Intentional friendly fraud has become today’s version of shoplifting.
- Unintentional friendly fraud. The quick click-and-buy system of many apps and websites makes it easy for a consumer to make an unintentional purchase.
- Fraudulent charges. Card-not-present fraud has risen dramatically as cybercriminals have learned new ways to exploit opportunities and vulnerabilities online. Consumers can be tricked by a well-crafted email into giving up their credit card information, and fraudsters have become proficient at hacking into networks to steal valuable consumer data.
- Merchant error. Transaction processing errors, such as duplicate transactions or confirmation errors, can result in a chargeback.
- Subscription cancellation issue. Consumers may have forgotten they’ve subscribed to a service, neglected to cancel, or didn’t expect an automatic renewal.
- Item not received. Items may not be received, including front-door theft, a problem with the final purchase authorization, or the wrong item was shipped.
How the Chargeback Problem Hurts Merchants and Issuers
The ease with which consumers can file disputes has made managing this increase a serious problem for merchants and issuers. According to the Javelin Strategy & Research report, “The Chargeback Triangle,” 53% of issuers and 72% of merchants believe that it is too easy for consumers to dispute transactions.
Issuers do not have the time or means to review each dispute thoroughly. Merchants are overwhelmed with chargeback fees and the time, effort, and expense required to dispute unwarranted chargebacks.
The ideal solution is to enable merchant and issuer collaboration. When the issuer can easily contact the merchant about a dispute and the merchant can address the problem quickly, or better still, the consumer can self-resolve by accessing enhanced transaction and merchant information, the number of chargebacks will decrease.