Transaction Disputes and the Issuing Bank Connection

When assessing the damages that result from transaction disputes, the focus typically is on merchants. After all, in 2017, they absorbed $19 billion in chargeback costs. However, issuers have been similarly affected, having shouldered $12 billion of the burden.
Issuers face a losing battle balancing the demands placed on them by federal regulators, credit card associations, merchants, and cardholders. They must somehow manage to satisfy the needs of many parties that are not always in sync, while protecting their own interests.
Issuer Pressures with Transaction Disputes
The 2018 Javelin Strategy & Research report, “The Chargeback Triangle,” reveals that $7.1 of the $12.1 billion costs incurred by issuers are from the combined liability of credit, debit, and prepaid card chargebacks.
These costs are directly related to the issuer’s regulatory responsibility to protect consumer rights during transaction disputes. The intent of these regulations is to protect cardholders from credit fraud, but the antiquated dispute management system has greatly driven up issuer expenses.
Underscoring the entire chargeback process are the constricting challenges applied to issuers by federal and credit card association regulations. Challenged to meet the demands of all requirements, issuer customer service personnel are ill-equipped to manage transaction disputes efficiently and cost-effectively – for their cardholders as well as the financial institution itself.
Either they don’t have transaction information available to sufficiently respond to customer inquiries, or they are unable to involve the merchants early in the process to prevent unnecessary chargebacks. This results in an increase in the number of fraud cases, as well as costly chargebacks.
An Overview of Regulations Z and E
The Federal Reserve created Regulations Z and E in part to protect credit and debit cardholders. While these two regulations are quite extensive and broad-ranging, it’s important for issuers to understand their implications and adhere to the rules in the context of the transaction dispute process.

  • Regulation Z. Commonly known as the Truth in Lending Act, the intent is to provide protection for and honest treatment of credit cardholders. Sections 226.12(b)(3) and 226.13(c)(2) deal specifically with the transaction dispute and chargeback processes – defining strict regulations on how issuers must respond to transaction disputes.
  • Regulation E. Commonly known as the Electronic Funds Transfer (EFT) Act, the intent is to provide guidelines on how cardholders should be protected when using automated teller machines, point-of-sale transactions, and automated clearing house systems. Specific to the transaction dispute process are the rules around consumer liability for fraudulent or unauthorized credit and debit card charges.

Issuers are bound by these key regulations and those defined by the credit card associations. Highly trained personnel must respond to cardholder disputes, while ensuring compliance with regulations.
Merchant Collaboration to Reduce Issuer Challenges
Issuers have come to understand that collaborating with merchants and acquirers is critical to reducing their liability. When issuers have the information needed to identify valid sales and fraudulent disputes quickly, they can reduce operational costs and their chargeback volume. This can be achieved by taking advantage of technological solutions designed specifically to enable merchant-issuer collaboration.
Contact Verifi to learn about solutions that facilitate merchant-issuer collaboration, which can help decrease dispute volume and improve the customer experience.