For an issuing bank, managing the priorities of customer satisfaction and profitability can feel like walking on a tightrope. Every step is taken with caution. It’s a daunting prospect and it takes great skill to keep your footing. If you over-invest in one area and under-invest in another, it disrupts your sense of balance. Then, it’s hello pavement.
With 163.6 million debit, credit, and charge cards in circulation in the UK, issuing banks are in great demand and under great pressure to protect their most important asset – customers. Customers count on banks to protect both their money and their personal information. It’s a huge responsibility, especially in today’s environment with identity theft rates increasing and fraudsters continually finding new ways to steal.
Not all Chargebacks are Created Equal
We know today’s customers are more demanding, and new technology and products means you have to spend more to keep them engaged. Customers are also flocking to online and e-commerce merchants in droves, and this has added complexities to various processes, especially disputes and chargebacks.
Customers have come to expect protection in the form of a chargeback from issuers. A chargeback is a way for cardholders to file a complaint and receive a full refund for a purchase that, in many cases, may have been made without authorisation from the cardholder. However, not all chargebacks are created equal. Some are legitimate and even necessary as a remedy for a dissatisfied customer, but the chargeback system is not fraud-proof and is easily exploitable for customers (i.e. friendly fraud).
Chargebacks Hurt Profitability
Whilst great for customers, chargebacks hurt profitability. They add to the operating costs of issuing banks. It’s estimated that the total cost of managing disputes and chargebacks can be up to 15% of operating costs. The cost of managing the chargeback process frequently exceeds the value of the product or service being disputed. “Hidden” costs include personnel, technology, and outsourcing expenses, write-offs on low value disputes, as well as false declines, which create unnecessary friction and bad cardholder experience.
What’s more, chargebacks substantially contribute to customer churn. Issuers face lower card usage if the dispute process takes too long. Customers are likely to relegate their card to the “back-of-wallet”, decreasing or stopping their use of the affected card entirely.
Although it’s seldom stated, issuing banks play an important role in the chargeback process. As a result, issuing banks have a responsibility to have a solid, proactive chargeback management strategy that utilises the most current fraud detection and prevention processes and technologies.
Each dispute leaves a data trail and most banks struggle to mine this data effectively. Merchant-issuer collaboration networks can improve such process inefficiencies and reduce dispute occurrences. These networks can help issuing banks understand the origin of disputes and analyse loss patterns, as well as reduce operating costs and write-offs.
Ensuring customer satisfaction and loyalty is important, but protecting profitability is also crucial. There should always be a balance between managing attention to customer service to earn customer loyalty, and managing the cost impact on the health of an organisation.
It’s important to take steps that ensure the delicate balance of protecting customers and profitability is not only preserved, but helps exceed customer expectations by leveraging solutions that could be a win-win for all stakeholders.