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Solving the Chargeback Triangle

We are now past the half-way mark of 2018 – a time of year you might think merchants can be less concerned with handling disputes and chargebacks than during the holidays and the weeks that follow when their dispute rates tend to spike. The reality is that merchants are impacted by transaction disputes and the adverse effects of chargebacks all year ‘round.
Verifi recently commissioned a report titled “The Chargeback Triangle,” which examined the effects of payment disputes and chargebacks experienced by each participant in a transaction – consumer, merchant, and issuer. In all, it’s estimated that chargebacks amounted to $31 billion in financial losses in the U.S. in 2017.
The origins of chargebacks are fairly well known. Many stem from vague descriptors on a consumer’s billing statement, making the transaction unrecognizable. Sometimes the descriptor is simply an unfamiliar merchant name, such as the parent company of the business where the transaction occurred. With billing statement in hand or already on their card-issuing bank’s online portal, many confused consumers contact their bank to inquire about the charge – and dispute it then and there. In fact, the research discovered consumers contact their issuing bank up to 76% of the time for certain types of disputes, entirely bypassing merchants and foregoing their ability to resolve the matter before it escalates.
Many consumers have also become savvy about how easy it is to dispute a charge by “gaming the system” to avoid paying for goods and services they purchased. By asserting to their bank that they never received the item, or didn’t make the purchase at all, consumers benefit from this type of “digital shoplifting” or “friendly fraud” when their bank issues a chargeback and reverses the charge. Mission accomplished by the misleading consumer.
Then, of course, there is true fraud – the nightmares that come from stolen credit cards, account takeover, and data breaches.
Without collaboration between merchants, issuers, and consumers, everyone pays the price from a protracted and outdated dispute process.
In the chargeback battle, the research discovered merchants bear nearly $19 billion of the costs from unnecessary fees, lost merchandise, sales, and profits. Consumers generally hold merchants responsible for the problems they experience with a transaction. The report found that consumers tend to reduce purchase behavior with a merchant by as much as 62% following a chargeback. Even worse, nearly two-thirds of consumers are more cautious about patronizing merchants like the one with which the dispute occurred.
Issuers are impacted too, as the report found they incur an estimated $12 billion in losses from disputes and chargebacks. As the consumer’s first point of contact in many cases, issuers have little recourse but to extend a provisional refund, even if the chargeback is frivolous or found to be friendly fraud. Issuers are largely motivated to keep consumers happy, as they must fulfill the regulatory responsibility to protect consumer rights. As a result, issuers suffer increased costs due to write-offs and added operational expenses.
Without understanding the long-term implications of chargebacks, consumers are ultimately impacted in the form of higher prices. What’s especially eye-opening is the report found that chargebacks can be prevented more than 80% of the time when the consumer simply contacts the merchant first.
Given the overall costs and consumer dissatisfaction associated with chargebacks, merchants and issuers must make prevention a year-round priority.
Some tips to help combat the growing chargeback problem from the research findings include:

  • Support information-sharing and collaboration between all three parties to streamline the dispute process.
  • Issuers should direct consumers with non-fraud disputes directly to merchants, rather than immediately processing the chargeback.
  • Merchants should engage consumers with disputes as an opportunity to improve customer service and brand value.
  • Issuers and merchants should proactively keep consumers informed of their dispute status without requiring constant phone interaction.
  • Issuers and merchants should better track the rate at which individual consumers dispute transactions to help reduce “friendly fraud.”

Given the current state of the chargeback process, it is easy to understand why merchants and issuers might feel resigned to their fate. When merchants, issuers, and consumers collaborate and form a “Chargeback Triangle” of cooperation, they can significantly reduce the number of chargebacks and their far-reaching costs.
 
This article first appeared in Payments Journal on September 12th, 2018 by Matthew Katz

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