The Dispute Landscape – Past, Present & Future (Part 1)
When I founded Verifi in 2005, the term “FinTech” was just gaining traction. And suddenly the SaaS transaction dispute solution I was working on had a category. Our first launch in dispute management was Managed Dispute Representment. By 2017, we had worked our way up the dispute cycle to resolve and prevent pre-disputes before a dispute representment is necessary. Chargebacks may never go away altogether, but we have made strides in controlling them throughout the dispute life cycle. I am proud of the ever-evolving teams that helped build, market, and sell our Total Dispute Management Suite – and add value to the Verifi brand. And now, as a Visa company, I am awestruck by what our company’s collaborative efforts have made into reality.
There’s no doubt that 2020 was a character-building year. Most inhabitants of the planet had to adjust their daily lives, causing reverberations throughout global infrastructures. With supply chains interrupted, air travel grounded, and people unable to gather, nothing has been business as usual. With physical movement all but halted, e-commerce transactions skyrocketed, along with disputes, causing many business categories – especially brick and mortar businesses – to suffer. As the situation drags on, customers are developing new buying habits, providing some businesses huge windfalls, while others struggle just to remain solvent.
From a payments perspective, let’s examine why the system is set up the way it is, some of the challenges we’ve faced, the gains we’ve made, and what the future may hold.
Why Disputes Exist in the First Place
Disputes play a pivotal role in the payments life cycle. Disputes provide recourse for cardholders and provide a feeling of protection and security when completing a transaction with a seller. Together, these elements can help drive sales.
Disputes also help protect sellers against fraudulent activity. Disputes ensure the integrity of card brand networks by providing a consistent, fair, and equitable process to resolve exceptions for all parties in the ecosystem.
The Evolution of Dispute Management
Before delving into what the future of dispute management holds, it would help to get some perspective on how we got here.
The chargeback was created in 1974, primarily to enact consumer protection regulations. In response, the Visa network dispute process was born. Since then, there have been numerous advancements in payment technology, payment channels, and addressing security needs.
However, it is only in the last 20 years that the industry has made progress optimizing and automating dispute management. In 2001, Visa launched the first major effort to simplify the dispute process, Re-engineering Disputes, known as RED. This effort consolidated dispute reason codes from around 48 to 22 and removed an entire response cycle to improve resolution time frames.
This effort also included the move to electronic information and documentation exchange in 2005, with the implementation of Visa Resolve Online (VROL). Prior to this, all information and documentation were exchanged mainly via the postal service through different colored envelopes representing each card network for sorting purposes. For inquiring minds, Visa’s envelope was blue.
2005 was also the year Verifi was founded. Our humble beginnings started in an apartment in Los Angeles with our first solution: Chargeback Representment. Over the next couple of years, as our client list grew, we heard time and again that sellers would like a way to communicate with the issuer in real time as a dispute was starting to escalate.
This industry need led to Cardholder Dispute Resolution Network™ (CDRN®). Launched in 2007, it was the first dispute network outside the walls of the card brands. It was also the first solution to reduce operational strain for issuers and gave sellers the opportunity to resolve a pre-dispute before it escalated to a chargeback. This resolution service reduced the operational, financial, and processing risks associated with elevated dispute ratios.
Because we’ve worked with many sellers and issuers, Verifi is in a unique position to innovate and build solutions for our users and react to their needs. In 2016, we launched Order Insight®, enabling what no other solution had done before: Facilitate the sharing of enhanced transaction details between sellers and issuers.
Visa had also continued to evolve the dispute process and launched another major re-engineering of the process with Visa Claims Resolution (VCR) in 2018. With this effort came a reduction from 22 reason codes to 4 general reason categories, as well as improvements to block invalid disputes and the creation of new workflows for even quicker resolution time frames.
The Real Impact of Disputes
Data from Visa shows that sellers challenge only one in three disputes. But understanding this statistic requires a look at some underlying context. The truth is most sellers have experienced frustration with understanding – let alone representing – disputes, which has led to the “Discouraged Seller” effect. Why bother engaging with a system that doesn’t make sense or work for them?
Completely ignoring disputes is not an option. If not addressed, then disputes can have far-reaching and severe financial impacts on all payments stakeholders. The good news is the majority of transactions are successful, and disputes make up only a small percentage of sales.
But if disputes are challenged or responded to by sellers only 33% of the time, then that means the other 67% of the time sellers absorb disputes as a cost of business. In fact, 76% of Visa disputes in NA1 are related to fraud.
Verifi research has shown that card-not-present (CNP) sellers experience 34% more cases of friendly fraud2 than physical channel sellers. That means for some types of businesses this number is much higher. These disputes are mainly caused by cardholder confusion, family fraud, or buyer’s remorse. In speaking with sellers across the globe, that number can be as high as 75%. It depends on the seller’s industry and business model.
Each of these statistics has a real and lasting effect, and there is no doubt disputes cause significant losses for stakeholders in the payments ecosystem.
Shifting Consumer Behavior
Over the last two decades, airlines and travel agents have been among the industries leading the revolution in how people make transactions. From telephone purchasing and travel agents to online agencies, e-commerce, and mobile commerce, the travel industry has been at the forefront of transaction evolution.
2020, for so many reasons, had been an interesting year because we have seen more changes, more innovation, and a greater shift in consumer spending than we have in the past two decades.
A prime example of changing behavior is the difference in CNP spending trends this year compared to recent history. Sellers across the globe have been affected by the pandemic and the loss of consumer access to brick-and-mortar stores.
In May 2020, The New York Times reported United and American Airline sales were down 95% from April 2019. The same article quoted a report from Airlines for America that showed a $350 million daily loss. But all reports were not doom and gloom.
In the same period, home furnishing outlet Wayfair’s earnings showed a 20% surge in Q1 Sales, and Netflix added 15.8M new subscribers in Q1. Consumers were quickly adapting to the “new normal”.
2020 aside, consumer behavior has completely changed over the past two decades, and consumer expectations have evolved as well. In the past two years, this evolution has noticeably accelerated.
Visa research has shown that between 2017 and 2020, CNP spending increased nearly 30%. I believe that this is, in part, a result of increased convenience consumption, such as food and beverage delivery, the ease of home delivery for apparel and home purchases, and the increased adoption of digital wallets by consumers and sellers alike. These advances have benefited many, but they have also allowed new vulnerabilities for fraud and dispute abuse.
Visa has shown there has been a 27% increase in disputes between 2016 and 20193 – strikingly similar to the rise in CNP spending. Ideally, we would not see CNP spending and disputes rise in tandem. The goal is to reduce disputes and ensure a positive experience for the consumer – the glue that bonds sellers and issuers together.
Unfortunately, the seller is often left out of the first customer inquiry that leads to a dispute: Up to 76% of the time3, customers contact their bank instead of the seller with a transaction inquiry. This reality has serious ramifications for sellers by not allowing them to provide best-in-class customer service, protect their brand value, and provide a direct resolution for their customer. In 63% of cases4, once a customer experiences fraud with a transaction, they won’t return to that seller.
Until recently, issuers did not have quick or easy access to additional transaction data. Typically, the only additional data they had was the merchant category code, which may be useful to help identify the transaction but not likely for most cases. Some issuers would pursue a simple internet search for additional data. But this took time and, in many cases, did not deliver any additional data to resolve the cardholder inquiry.
Toward the end of 2019, Visa acquired Verifi, and the leader in global card transactions was now in collaborative partnership with the global front-runner in post-transaction dispute services. In one short tumultuous year, the companies have made great strides together in CNP disputes solutions.
* Visa Internal Reporting 1 Visa Internal Reporting 2 The Chargeback Triangle, Javelin Strategy & Research 3 Visa Internal Reporting 4 The Chargeback Triangle, Javelin Strategy & Research
