Spike in disputed payments causing headaches for card industry

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The credit card industry’s No. 1 concern during the coronavirus pandemic is that tens of millions of Americans are unemployed and struggling to pay their monthly bills.

But the COVID-19 crisis has also given rise to a second problem: a sharp increase in the number of disputed card transactions, as airlines have canceled flights, performers have postponed concerts, and supply chain disruptions have delayed the delivery of many goods.

In June, chargebacks that were not a result of fraud were 23% higher than during the same period a year earlier, according to e-commerce data released Wednesday by the payment processing firm ACI Worldwide. A Mastercard executive estimated that the increase in requests for consumer refunds has been even larger — somewhere in the range of 35% to 40% higher than last year.

“There’s no question that the number of chargebacks has increased,” said Marie Russo, a senior vice president at Mastercard who is responsible for dispute resolution management, “just due to the circumstances around COVID.”

The number of disputed transactions is still small in comparison with the total volume of U.S. card payments. Before the pandemic, Brian Riley at Mercator Advisory Group estimated that around four in 10,000 credit card transactions were the subject of a dispute. It is also the case that COVID-19 has been a boon for the electronic payments industry, as many transactions that were previously conducted in person are now being handled online.

Still, the recent jump in chargebacks is having important consequences for card-issuing banks, retailers and other players in the electronic payment ecosystem.

Payment disputes have been adding to long waits at call centers that have also been hit hard by customer requests for forbearance. Riley offered some advice to consumers who call their credit card company: “You’d better be prepared to read a book or something.”

It is not just banks that have gotten slammed with phone calls from dissatisfied consumers. Many retailers are in a similar position, in part because shelter-in-place orders impacted their ability to operate call centers effectively. “Some merchants that we work with,” said Erika Dietrich, a vice president at ACI Worldwide, “just didn’t have the ability for their call center staff to work from home.”

The travel and entertainment industry, which does not typically deliver physical goods, but instead offers experiences that require people to leave their homes, was especially hard hit, particularly in the early days of the pandemic, according to Jodie Kelley, CEO of the Electronic Transactions Association. “Certain merchants are just getting flooded with requests,” she said.

The pandemic has also presented new challenges for Visa and Mastercard, which play a key role in managing the disputes that arise between card issuers and merchants.

In May, Visa announced that it would waive COVID-related dispute fees for merchants. Typically, merchants who meet certain thresholds of disputed transactions have to pay certain penalties. Visa also implemented a COVID-19 dispute monitoring program to help reduce the volume of invalid disputes entered into the system.

Mastercard has published answers to frequently asked questions about the kinds of disputes that have been arising during the pandemic. In a scenario where the customer chooses not to board a flight because of a mandated quarantine at the destination, the Purchase, N.Y.-based card network says that there are no chargeback rights. The same is true for air travelers who purchase tickets but are not allowed to board flights because of either their nationality or a medical condition.

However, in a situation where a consumer bought tickets to a concert that was later postponed due to COVID-19 restrictions, chargeback rights do apply, according to Mastercard.

The sharp rise in disputed purchases has also had big implications for the financial institutions that process card transactions for merchants. Amid the pandemic, Square began holding back 20% to 30% of the money that it was collecting from customers of certain retailers, The New York Times reported in June. The reserves angered some merchants that use Square, because they threatened to tie up the small-business owners’ cash for months.
Square said in June that only 0.3% of its sellers have such reserves on their accounts. It noted that when the macroeconomic environment shifts, the likelihood of chargebacks may increase in certain industries.

“The vast majority of our sellers don’t fit this profile,” Square said in a blog post. “For the small number who do, we put in place reserves that allow them to continue processing with Square.”

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Credit cards Chargebacks Mastercard Visa Coronavirus Fraud