Merchants Bear a Heavy Cost from Non-Fraud Chargebacks

Register now

There are shortcomings in prevailing chargeback procedures that are costing merchants billions of dollars each year.

There are a number of systems in place to protect the consumer from fraud-related chargebacks, with Visa’s TC-40 and MasterCard’s SAFE working pretty well in instances of outright fraud. However, the information in these lists is not very well suited for preventing chargebacks in the situations that may not involve fraud, such as buyer’s remorse, damaged merchandise, wrong items, etc.

This is because the information contained in the TC-40 and SAFE lists can be difficult for merchants to acquire in a timely manner, meaning merchants are hit with chargebacks before they even know there is a problem.

Even worse, if a merchant is unlucky enough to get too many fraud and non fraud chargebacks or fraud reports, that could trigger an association's chargeback monitoring process or adversely affect the merchant’s billing authorization success. Outside of being expensive and time consuming, the most extreme instance could even lead to expulsion from the Visa or MasterCard network entirely. Unable to accept bankcard payments is the kiss of death for many merchants, especially online and recurring merchants.

Here’s a common scenario: Alice notices a charge on her bill from Bob’s Comics that she did not make. She calls the issuing bank for her credit or debit card and denies making that purchase. Most likely, her bank will issue a provisional credit to her account and charge back the amount to Bob’s acquiring bank. Now that bank will investigate the disputed charge and if it’s valid, the amount is deducted from Bob’s account and he is notified of the chargeback. (Along with any fines, fees and penalties from the card association and the acquiring bank.)

Chargebacks can occur for a number of reasons: fraud, returns, dissatisfaction, even authorization and processing errors. Consumers might also engage in “friendly fraud,” in which they make a purchase but dispute the transaction to avoid paying for it.

Making it worse, Bob may have to wait days, weeks or even months before he is notified of the dispute and chargeback. This is because the issuing bank has to notify the card associations first and then in turn, the association then aggregate the data for all the issuers and share it back out to all issuing banks. The lag time in chargebacks from the sale date can also be very long, upwards of 180 days from the sale date. The merchant is the last to know. It is a slow process and the merchant pays the price.

For Bob, chargebacks cost time, money and headaches in dealing with a dispute that could usually be more easily handled between Alice and Bob. (Most consumers contact their issuing bank directly, rather than approach the merchant first.) Moreover, reports indicate that for every $100 in chargebacks, it costs merchants $308 in wasted time, expensive fees, penalties or additional losses of goods and services. In many cases, it simply is not worth the expense of to dispute the chargeback through the representment process.

So now, Bob has alienated Alice through no fault of his own, he is out money for the sale, and he now has a chargeback record with the Association and his acquiring bank. If this happens too often he could be placed on the Association’s Merchant Chargeback Monitoring Program who has no loyalty to Bob; it’s understandable, as it wants to protect its own brand with consumers like Alice. So he might be forced to reduce chargebacks over three months or face increased fines for every chargeback.

Yet the problem is not chargebacks per se, which were enacted in The Fair Credit Billing Act of 1974 as a form of consumer protection. The speed at which the information around these disputes is shared amongst the parties, particularly with regard to reliance on TC-40 and SAFE list reports could stand some improvement to resolve disputes more efficiently. The key is resolving the dispute between merchant and customer and issuing bank before it escalates to the card association.

So when Alice calls with her disputed charge, instead of reporting the dispute up to the Association first, the bank would notify a third party resolution service that is integrated with and supports Bob’s business. These services immediately notify Bob of the dispute and then help him resolve Alice’s problem directly, without triggering a chargeback process. He could decide to refund her money, saving his business and the banks involved the time, hassle and costs associated with the chargeback process. Alternately, he can decide to allow the normal procedure to continue and accept the chargeback risk. It’s his choice.

But what if it’s not a disputed charge? Another example is that Bob offers online subscriptions for his comics, billed every month. Alice decides she doesn’t want a subscription anymore and tells her issuing bank to stop paying Bob. Under the current system, Bob wouldn’t know about this for some time, and perhaps he’d have already billed Alice again if she had called late in the billing cycle. She’d have to call the bank again, resulting in a chargeback.

Today it is possible for a post billing chargeback notification platform to process hundreds of thousands of cases monthly and to enable almost near real-time collaboration for both fraud and non-fraud chargeback disputes. By integrating directly with card issuers and redirecting disputes from the issuer to the merchant for resolution, disputes can be resolved before they escalate and become chargebacks. In this scenario, everybody wins; merchants avoid costly fees, fines or penalties while Issuers experience lower operating expenses while supporting cardholder satisfaction through timely resolution.

The above platform closes the loop with the merchant and does not does not rely on data from TC-40 or SAFE lists. Merchants who continue to depend on such data for chargeback prevention tend to see high defect rates (chargebacks that still occur even when the customer is credited appropriately) as well as high false positives (paying for an alert that is not truly a chargeback) that leads to higher costs and profit loss due to over refunding.

TC-40s and SAFE list certainly have their uses, so they aren’t going away anytime soon. But neither will prevent fraud or chargebacks. The way forward is a collaborative dispute resolution network that closes the loop before chargebacks occur. In our experience, using a dispute resolution network could reduce chargebacks by up to 40% and give merchants and issuing banks another tool to keep customers happy and save money.  

Matthew Katz is Founder and CEO of Verifi.

For reprint and licensing requests for this article, click here.