Network chargeback changes are a good start, but more work is needed
Card schemes are responding to a demand for change in how we handle chargebacks.
Visa introduced its Visa Claims Resolution initiative last April, and Mastercard followed suit not long after. The Mastercard Dispute Resolution update is now undergoing a phased rollout scheduled to be complete in 2020.
Both the Visa Claims Resolution and the Mastercard Dispute Resolution initiatives—VCR and MDR, for short—represent attempts to overhaul the card schemes’ chargeback processes. While similar, the two policy sets have key differences.
Visa completely overhauled its reason code system. All disputes are separated into one of four categories based on reason code: Fraud, Authorization, Processing Error, and Consumer Dispute.
The company developed two separate workflows for these disputes, referred to as “Allocation” or “Collaboration.” Disputes tied to fraud and authorization errors go through the Allocation process, automatically assigning liability to the party responsible. For processing errors and consumer disputes Visa’s chargeback process remains largely the same. Visa also stipulates communication between parties should be carried out through the Visa Resolve Online (VROL) system.
Mastercard's MDR is undergoing a longer rollout in four stages. While the company hasn’t yet made details on every aspect of the initiative public, revamping its reason code list seems to be a top priority. Mastercard seeks to eliminate redundant and outdated reason codes as well as those fraudsters often abuse
Mastercard also demands banks collect more detailed information before filing a dispute. Institutions must also check to see if there are refunds or reversals associated with a transaction, which helps prevent merchants from becoming victims of unjust enrichment or double refunds.
Chargeback changes are necessary because we’ve seen revolutionary upheaval in the global payments environment over the last five decades.
Payment cards are much more ubiquitous now. E-commerce, mobile payments and voice-enabled commerce did not exist when Visa and Mastercard first laid out their chargeback processes. In spite of that there’s been little change to how we handle disputes. The result is a disconnect between policy and reality in the payments industry, and that creates new vulnerabilities. For example, the ease with which cardholders can file disputes led to the rise of threats like friendly fraud.
The financial impact of friendly fraud increases by an average of 41% every two years, now representing between 60-80% of all disputes. We expect the lost sales revenue, merchandise, fees, and threats to sustainability will have an annual financial impact of more than $25 billion by 2020.
By 2022 credit cardholders in the US will complete 68.8 billion transactions worth $4.72 trillion. At the current rate, 24.6 million of those transactions will end up as a dispute, and most of them will be friendly fraud. This is a problem that won’t go away on its own, which is why it’s vital that we take action against chargeback abuse now.
Policy updates like Visa Claims Resolution and Mastercard Dispute Resolution are the card schemes’ recognition that something needs to change. The question, though, is whether it will be enough.
VCR and MDR can help make the chargeback process faster and fairer for all parties involved. For example, Visa’s stated goal is to ensure that the average dispute is resolved in no more than 31 days. In turn, faster and more accurate resolutions will reduce merchants’ costs and overhead. At least, that’s the intent.
Unfortunately, as a survey conducted last year shows, not all merchants noted positive change after VCR implementation. While a more dynamic and responsive resolution process helps, these initiatives can only do so much. If we’re going to retool chargeback policies, we should take the opportunity to reevaluate for the needs of a digital-enabled market. This would benefit merchants and banks alike.
The direct costs of chargebacks fall overwhelmingly on merchants, but banks end up paying a significant amount, too. Javelin reports that of the $31 billion lost due to chargebacks in 2017, banks bore $11.6 billion. The problem is banks have a direct incentive to keep customers happy, and so accept the losses associated with ever-increasing numbers of chargebacks.
What we need is to establish more consistent, clear policies and processes that are applicable across all card schemes. This is certainly a daunting prospect, but it’s not impossible. There’s already a precedent for industrywide, comprehensive changes like this. If we compare it to the adoption of EMV technology, which was a massive inter-brand undertaking, standardizing chargeback processes and policies would likely be much simpler.
With inter-scheme cooperation, we could establish a kind of “dispute credit score.” This would allow banks to identify consumers who habitually abuse chargebacks. That’s just one of the potential innovations we can see with more standardized chargeback practices.
While VCR and MDR represent progress, it will take much more to produce substantial change. It won’t be easy, but it will be a necessary step to ensure long-term viability for e-commerce.