By Gabe McGloin, Head of International Merchant Sales & Business Development, Verifi
Chargebacks have existed since the early days of distance selling – the predecessor of e-commerce. Mail-in catalogues and Avon ladies were some of the earliest ways consumers could purchase products and wait for them to arrive at their door. Chargebacks have been a part of this cycle since just after the Consumer Credit Act of 1974. From missed deliveries to damaged goods, people will push for their money back when the customer promise is broken. And chargebacks afford customers this protection. However, modern technology may have tipped the scales too far toward the customer, at the expense of merchants.
Retail has evolved dramatically from those early days. We live in an omnichannel universe where buying and selling happens across diverse platforms and in many different ways. However, chargebacks have remained mostly unchanged from the distance selling era. They are the last remaining dinosaur of old payments processing to survive into the 21st century.
Chargebacks are now causing merchants more trouble than ever. The ease of online and card payments has made challenging a transaction or demanding the refund of a payment second nature for consumers, with merchants bearing the burden of proving the transaction valid. Yet, it doesn’t have to be this way. By collaborating and sharing data, merchants and issuers can resolve many disputes before they turn into a full-blown chargeback.
Nipping it in the bud
Chargebacks represent a growing black hole for merchants, costing them $19 billion each year. Once a chargeback gets underway, there’s little that can stop it. Merchants must comply, completing all processes and admin required – which represents 60% of the amount they lose in operational costs alone. The best way to manage chargebacks is to stop them before they begin.
Chargebacks are an accepted part of the payments ecosystem, but they’re far from being the only recourse. A transaction disagreement can begin at many different points of the customer journey. If a customer calls the issuer to inquire about a purchase they don’t recognize, this presents an opportune time to solve the problem. The issuer can quickly review the transaction details to confirm a valid sale or prevent an attempt at friendly fraud, and avoid the dispute.
At the beginning of the post-transaction life cycle, communication and collaboration are essential to prevent pre-disputes from escalating. With the right information supplied to the right party at the right time, chargebacks can be avoided.
However, the reality is that many transaction disagreements continue to progress and become chargebacks, due in large part to a simple lack of collaboration. This is especially true in situations where the process begins as a result of customer confusion rather than a grievance – such as a forgotten transaction or poor descriptors on a credit card statement. It’s here, usually, that the issuer is lacking the detailed transaction data and is obliged to initiate a chargeback. It’s at this moment that the administrative burden of chargeback representment begins for the merchant.
A smarter approach to dispute resolution
It doesn’t have to be this way. The problem in many cases can be solved at the pre-dispute stage, stopping the chargeback from being officially filed. This is the point at which the customer first contacts their issuer to raise a question or concern with a transaction.
From here, disputes can go one of two ways. One, disputes can be avoided if the issuer can detect friendly fraud or provide the customer sufficient clarity to validate the transaction. Or two, the customer wishes to move forward with filing the chargeback, and the merchant is left to decide whether to accept liability for the chargeback or represent it.
Fortunately, existing technology can make avoiding the lengthy process of a chargeback easier. Pre-dispute solutions currently in the market can prevent and resolve disputes before they escalate to costly chargebacks. Such systems automatically share merchant transaction details with issuers and their customers as soon as a payment is queried. If a consumer calls their bank to question an unrecognised purchase, then the representative can quickly review the transaction details to confirm a valid sale, thereby avoiding an unnecessary chargeback.
When the dispute isn’t caused by a misunderstanding, merchants and issuers can still work together to accelerate resolution and avoid a chargeback. Through logic-driven programming, rules can be set to initiate a full, automated refund if certain parameters are met. Another solution actually provides a window of time where the merchant can review the transaction data and reason for the dispute before deciding to resolve it or not. Regardless, the operational impact of a chargeback can be avoided, and all parties enjoy a quick resolution.
Quick visibility of transaction details can prevent unnecessary disputes. However, it’s important to stress that these resolutions depend on the free flow of data between issuers and merchants. Both parties suffer during the chargeback process, so the impetus is there – all that’s needed is for issuers and merchants to implement existing communication channels for the exchange of detailed transaction data.
When connected to a common, existing dispute resolution network, issuers and merchants can work together, sharing transaction data and resolution parameters to head off disputes at the pre-dispute stage. This collaboration can result in one of three outcomes: One, the customer will understand the transaction was valid and is happy to not move forward with the chargeback. Two, the customer will be presented with such compelling evidence that they rethink proceeding with friendly fraud. Or three, if the customer does move forward with the chargeback, then the merchant can simply refund the customer to avoid the negative impacts of a chargeback whether or not the transaction is true fraud or not. All three solutions require collaboration, but ultimately work out better for all stakeholders in the transaction.
Chargebacks are not heading for extinction any time soon, but pre-dispute solutions can help prevent many from ever existing. These pre-emptive measures are available currently and enable merchants and issuers to work together to create a path towards resolution. By using pre-dispute solutions merchants can not only protect themselves but also preserve the customer relationship and secure the future of their business.