The Case for a New Chargeback Prevention Model
The e-commerce world is moving faster and faster, becoming more global and mobile. Banks and merchants have traditionally focused on protecting their customers from third-party fraud. They must now also protect themselves from the risk of financial loss as a result of first-party fraud, or friendly fraud, when a customer disputes genuine transactions and obtains a refund for purchases they actually made.
Sadly, this is a growing challenge to banks and merchants that is likely to escalate rather than subside. This growing problem has a significant impact on businesses, with current figures suggesting that chargeback losses could reach nearly £21 billion globally by 2021.
The Way We Work Now
Fuelled by high-profile data breaches and fraud occurrences, most merchants generally assume that third-party fraud, or true criminal fraud, is the most common form of fraud and accept the resulting chargebacks as a cost of doing business. In reality, according to the LexisNexis True Cost of Fraud Study 2016, roughly 28% of total fraud losses resulted from friendly fraud and chargebacks, with true criminal fraud only responsible for around 23% of those losses.
The problem for merchants is that cardholders will nearly always go directly to the issuer to file a transaction dispute. But the issuer doesn’t have the information on hand to confirm whether the transaction is legitimate or indeed fraud. The issuer has but little choice but to reverse the sale, withhold the funds in question from the merchant’s account pending resolution of the matter, and provisionally credit the cardholder’s account.
First-party fraudsters largely go unchallenged by issuing banks, and merchants wear the loss. There’s a cost to issuers, too. Managing chargebacks is resource-draining and incurs chargeback processing costs, operational expenses, and losses from low value write-offs.
New Ways of Working Together
The key to stopping this type of fraud is effective data-sharing between customers, issuers, and merchants. The best way to prevent friendly fraud is for merchants and issuers to collaborate and share the right information, in the right place, and at the right time, and work with customers to resolve disputes as early as possible.
Data-sharing connects all parties for mutual benefit. Collaboration-based technology that provides insightful information about the customer’s order from the merchant’s system about the transaction, in near real-time, produces multiple benefits. Purchase details such as product description, size, colour, quantity, and the device used to make the purchase (along with the merchant’s address, website, and logo) shared directly with the customer and issuer help to validate a transaction, resolve billing confusion, and reduce unnecessary chargeback initiations. More importantly, such a shared feedback loop would include the merchant early in the dispute process.
Working together across the payments ecosystem has becomes standard operating procedure, with new technologies emerging to help businesses communicate, collaborate, and share data. This is in line with customers of a new digital generation, who are fully accustomed to all the technological tools at their disposal and demand greater transparency, trust, and access.
To make the most of these trends, businesses need to take a more collaborative approach to how they design their chargeback prevention strategy. That means taking into account all the different parties with whom they interact. Ultimately, this will create a new paradigm that will seamlessly share information with customers, issuers, and merchants. One that will resolve chargeback disputes, improve customer experience, and protect profits – a truly collaborative solution.