A Javelin Strategy & Research study, underwritten by Verifi and published in May 2018, cites communication gaps as a leading cause of disputes and chargebacks. The 36-page report, titled The Chargeback Triangle, examines chargeback costs and impacts while demonstrating how to prevent chargebacks by resolving open issues.
In 2017, chargeback volumes reached $31 billion, including $19 billion in merchant losses and $12 billion in issuer losses, researchers found. Matthew Katz, CEO at Verifi, said improved collaboration among industry stakeholders would dramatically reduce these numbers.
“The report clearly indicates that collaboration between issuers, merchants and consumers is critical to resolve disputes effectively and avoid the direct and extended costs that chargebacks and consumer-initiated ‘friendly fraud’ cause for merchants and issuers alike,” he stated. “In the end, the consumer pays the price in the form of higher purchase prices, as well.”
In an interview with The Green Sheet, Katz called for industrywide changes in risk mitigation and chargeback management. “When you consider the sheer size of the card brands and major card issuers like Capital One and Wells Fargo, it’s hard for enterprises that are so large with so much investment in technology to keep up with the times,” he said. “We rely on each other to make changes across the board ‒ from cardholders all the way through to the merchant.”
Sunk costs, attrition
Researchers found the costs of managing the chargeback process frequently exceed the value of a disputed product or service. “For every dollar in disputed transactions, an additional $1.50 is spent [by merchants and issuers] on fees, management expenses ‒ including technology and outsourcing ‒ and personnel,” they wrote.
Following are additional report highlights:
- Post-chargeback consequences: Consumers who have charged back a merchant may cut back purchasing by up to 62 percent and are more cautious when shopping at similar venues.
- Lengthy resolution processes: When resolutions become drawn out, blame may shift to the card issuer and lead to customer attrition.
- Friendly fraud: Assessing consumer-initiated friendly fraud can be a thorny issue for issuers. Both merchants and issuers agree it has become too easy for consumers to dispute transactions.
- Chargeback prevention: If consumers contacted merchants before contacting their card issuers, more than 80 percent of chargebacks would be prevented.
Card brand mandates
The report references the Visa Claim Resolution (VCR) process, a newly launched initiative by Visa designed to simplify disputes. Katz expects banks to make additional investments in the program. “The benefit of being a card brand is having the ability to mandate a change,” he said. “Visa set an effective date of April 14, 2018, for VCR, and Mastercard will be introducing a similar program in the near term. There has been a learning curve in the two months following VCR’s effective date in terms of what works, what doesn’t and how to improve.”
Katz said at first glance, VCR may appear to oversimplify chargebacks, but it hasn’t done away with former reason codes. Instead, it aggregates 22 original reason codes into 20 categories, which are then organized into four distinct themes, he noted. This is meant to bring clarity to the chargeback system, while maintaining a consistent experience across all channels.
“In retail, the buying experience is consistent across all channels, whether you are buying a shirt in a store, online or by using a mobile app,” Katz said. “What is different are the risks involved in each channel and how merchants, acquirers and issuers monitor and view these risks. These channels are predicated on the same concept of buying a shirt.”
Differentiate CNP merchants
Noting that most card not present (CNP) merchants are held accountable to the same risk thresholds, Katz said he would like to see more differentiation across CNP channels. “Internet, mobile, retail and IoT [Internet of Things] commerce need to be viewed differently by the card brands and monitored differently than they are now,” he said. “The card brands need to set lower risk tolerances in channels that have a higher propensity for risk.”
The IoT is a uniquely different CNP channel, Katz said, because unlike retail, online and mobile transactions, where consumers can make additional impulse purchases, the IoT facilitates targeted micro transactions. “The proliferation of commerce-enabled appliances raises the potential for curious children and inattentive consumers to inadvertently place orders,” he said. “We may have to monitor our phones, appliances and wearables with the same vigilance as we currently monitor our networks and primary connected devices and networks.”
Srii Srinivasan, CEO at Dallas-based Chargeback Gurus Inc., said CNP merchants that offer stellar customer service and lenient refund policies generally have reduced chargeback volumes. She recommended the following additional CNP best practices:
- Billing transparency: Notify customers of subscription-based merchants about billing terms prior to and after the sale.
- Truth in Marketing: Set realistic expectations about products and services.
- Protect against fraudsters: Build a negative database to prevent friendly fraud customers from placing orders again. They may reorder products and services to see if they can get away with it.
- Use chargeback prevention tools: Consider using predetermined prevention alerts and frictionless 3D Secure tools to stop chargebacks before they happen.