Chargebacks are a problem for everyone involved in the dispute process – merchants, consumers, and issuers. The trickle-down effects of chargebacks extend well beyond a lost or refunded sale, with disgruntled customers and seemingly endless communication problems, increased operational expenses and reduced profits for merchants and issuers.
In 2017, chargebacks amounted to a $31 billion problem. This number only sits on the surface of larger, pervasive problems that chargebacks cause throughout the entire payments ecosystem.
Apart from out-and-out fraud, no consumer is driven by a desire to file a transaction dispute. The hassle, confusion, and frustration typically outweigh the benefit of receiving a refund on a lost package or invalid order.
Solving the chargeback problem comes down to one fundamental factor – communication. The better the communication between merchants and issuers, merchants and consumers, and issuers and consumers – the easier it is to reduce the number of chargebacks and even prevent their occurrence altogether.
This need for better communication in coordinated effort is reinforced by findings in a new research report, commissioned by Verifi and conducted by Javelin Strategy & Research. This groundbreaking report, The Chargeback Triangle, was informed by an online survey of 2,000 U.S. consumers, 300 executives influencing chargeback policy for U.S. merchants earning $10 million and greater in revenue, and 200 executives influencing chargeback policy at card-issuing U.S. retail financial institutions.
What Is the Chargeback Triangle?
The Javelin report examines the experiences and perspectives of consumers, issuers, and merchants as they relate to chargebacks, illuminating ways to reduce costs and bolster customer satisfaction during a dispute and any subsequent chargeback attempts.
Chargebacks can be mitigated and even prevented through coordinated communication between consumers, merchants, and issuers. By removing confusion and misunderstanding from the process and opening the lines of communication, consumers can self-resolve disputes, or address them directly with merchants; merchants and issuers can share information, and issuers can connect merchants and consumers.
This creates a connected triangle in which each party is invested in improving the consumer experience, reducing loss, and streamlining the dispute resolution process. Greater collaboration between issuers and merchants can help preempt chargebacks and eliminate the burden of a formal dispute process. Success is measured not only by avoiding financial liability for the transaction but also by retaining the consumer’s loyalty with an excellent experience.
The Chargeback Problem
The Chargeback Triangle provides key findings that reinforce the global problem of the chargeback problem.
- $31 billion chargeback problem. Of the financial losses associated with chargebacks in 2017, $19 billion was borne by merchants, while issuers absorbed the other $12 billion.
- Issuer loss acceptance. Issuers prefer to accept losses on frivolous chargebacks rather than risk the loss of a customer by refusing a refund.
- Merchant chargeback-related costs. The chargeback process places the majority of the financial burden on merchants. 60% of merchants’ chargeback-related costs come from chargeback management expenditure, rather than liability.
- The friendly fraud challenge. Assessing friendly fraud is a significant challenge for issuers. Nearly half of in-app digital goods chargebacks are a result of friendly fraud.
- Merchant-customer communication success. Merchants that are contacted by the consumer before the initiation of a dispute report better than an 8 in 10 success rate in preventing the issue from becoming a chargeback.
How to Solve the Chargeback Problem
Addressing the challenge requires a coordinated effort among merchants, issuers, and consumers. The remedy is for merchants and issuers to work in collaboration, to reduce liability, protect revenue, and improve consumer loyalty.
The chargeback system in its current state is not going to fix itself. It’s time to open the lines of communication and create collaborative channels. Read The Chargeback Triangle research report for details on the value of collaboration and other key findings from the study to help reduce your chargeback burden.