Ryan: From your perspective, what volume of chargebacks can merchants expect from the 2018 holiday shopping season? And do you think that this will be better or worse than it was the previous year?
Rick Lynch, Senior Vice President, Business Development at Verifi: Well e-commerce is continuing to explode, and projections are already showing that sales volume will definitely be up again this year. It’s been a pretty good year for the economy. Volume is expected to be up, and of course, more people are moving to the online channel to purchase. So it’s definitely going to increase. In terms of chargebacks, the question is really, Is the ratio of chargebacks going to go up because the volume is up? We also are expecting a higher dollar amount of chargebacks to occur. But we also are expecting the higher percentage of transactions to become chargebacks. That’s driven by the fact that the EMV migration has driven much of the fraud behavior out of the brick-and-mortar channel. The guys that are committing fraud don’t just decide not to do fraud anymore. They look for the path of least resistance to continue to perform that fraud. And so that volume of fraud has moved to the online channel. So fraud is probably more concentrated now in the e-commerce sector than it has ever been before.
Ryan: From your perspective, what do merchants need to keep in mind to help prepare themselves for the unfortunately inevitable chargebacks that are going to be coming from this? In particular during the holiday season and after as well?
Rick: When you’re looking at how to prevent chargebacks as a merchant, there’s always a cost versus benefit. There’s a lot of tools in the marketplace that you can employ, but they all represent additional costs on that transaction. So you don’t want to employ all options all the time. It’s important for merchants to assess their business and use their own knowledge of what has transpired so far, to determine which products are the most risky, the ones that are most likely to be charged back. Many merchants can probably whittle down some of the things that they’re selling, if not a majority of the things that they’re selling, and have an average amount of chargeback and fraud prevention protection on those. But there’s usually a small percentage of products that represent a disproportionate risk to a given merchant’s business. And if you are a merchant, those are where you’re going to want to concentrate your research, your fraud solutions, your manual review, to make sure that the expense of preventing chargebacks is concentrated where the risk is greatest. In terms of third-party fraud solutions, there are things like IP geolocation, device ID, 3D secure, and chargeback alerts. All of these solutions are very effective at helping to prevent or to mitigate losses. Again, it’s really important for the merchants to use their own knowledge about where the risk is coming from, to focus the increased cost per transaction on to those products that they believe represent the greatest risk.
Ryan: So basically, merchants should put the resources where they ultimately feel the greatest risk will be, as you point out. What do you think from bank card issuers can do to help merchants mitigate the risk of chargeback?
Rick: Banks are probably now more than ever focused on establishing relationships with merchants. Years past, decades past, there was a big disconnect between merchants and banks and there really wasn’t any kind of interaction or dialogue. That’s changed a lot just in the last couple of years. Verifi’s own solution, the Cardholder Dispute Resolution Network (CDRN), is a solution that connects merchants directly to banks and gives merchants the ability to find out about a potential dispute before that dispute is officially filed as a chargeback. The CDRN network provides that information, gives merchants almost instant information about a dispute, and in some cases it can allow a merchant to stop shipment on an order they’ve already shipped. Or if they haven’t fulfilled that order yet, they can actually just end the order and not ship the product at all. If the product has shipped, and they know the transaction is at risk, that’s an opportunity for the merchant to try and get ahead of the problem by gathering and making sure that they have captured sufficient information that they will need when that eventual chargeback does occur so that they have the information readily available to submit a good response to fight and win that chargeback. So banks are very excited about merchants that are looking to take proactive steps to prevent chargebacks. There are solutions like the one that Verifi offers in the market that merchants can employ that they can give them a real-time heads up on a dispute, sometimes within a matter of a few seconds of that dispute being initiated.
Ryan: I think I get what you’re saying here is really that transparency of this data plays a big role in helping to kind of mitigate chargebacks. Correct?
Rick: Transparency and timing. With e-commerce, we are in a world where a customer can shop from anywhere on the planet with one click. And so the speed and convenience of being able to buy is phenomenal. It’s instantaneous, but what has lagged behind is the dispute process itself. Many merchants are surprised to find out that the chargeback, when it occurs, isn’t typically notified to a merchant until maybe two to three weeks after that customer has actually complained. Once that chargeback is filed, it can take up to four months for that dispute to finally be resolved in the favor of either the merchant or the cardholder. That’s kind of crazy in this world of instantaneous e-commerce transactions. The banks realize this, and they’re working with partners like Verifi to make this a real-time dispute system that matches up more appropriately with the real-time purchasing that we already are enjoying.
Ryan: Certainly. Now “friendly fraud” is certainly a very interesting subcategory when it comes to fraud here. What is a good way for merchants to mitigate friendly fraud without losing the potential return of customers?
Rick: Friendly fraud has been an unsolvable problem for a long time. Verifi has been working on that pretty intensely. We have a solution called Order Insight which is specifically designed to address that. What we’ve learned is that in many cases friendly fraud is an intentional fraud. It is usually tied to a legitimate purchase that the consumer is confused about. It’s possible that a spouse or child made the purchase and the primary cardholder is unaware. Or maybe the information that the customer has been provided on their billing statement is unclear and it doesn’t remind them that that purchase is actually something that they made. Our solution Order Insight is meant to connect a merchant’s purchase information around the original sale back upstream to the issuing bank so that when a cardholder calls and says, “I don’t recognize this transaction,” the bank agent on the phone can quickly retrieve that information and review that purchase in detail with the cardholder. This is a way for the cardholder’s memory to be jogged if they don’t recognize the payment descriptor or customer service phone number on the billing statement. The bank agent can say, Well, here are the products that were in your checkout. Here’s the location of the store. Here’s the website address of the site where you purchased. They may have things like email address of the purchaser as well. So all that information is a rich data set that the banks normally did not have before our Order Insight product was made available. And now we’re finding that with the banks being given this information and having it available to them during the discussion with the cardholder that as many as half of all disputes are being resolved with the customers, who say “You know what? I recognize that purchase. I don’t need to charge back. Thank you for the information.” So long story short, much of what we consider to be friendly fraud is largely due to customer confusion. And in many cases we’re finding that the customers, once they can resolve that confusion, don’t want to dispute the charge. But the key there is getting that information into the customers’ hands so they can make that decision.
Ryan: Excellent. Now, I’d like to shift the conversation over to the mobile side of things. On our end, we’ve certainly seen mobile during the holiday shopping season, really playing a much larger role. And it’s not really much surprise to a lot of people just considering how people are shopping nowadays. But how does that translate into chargebacks? And how is that different from traditional chargebacks?
Rick: Sure. So mobile being a different purchase platform represents some challenges for merchants. Obviously in the brick-and-mortar environment, you have a signed sales receipt, and that’s very valuable in helping to protect the merchant’s purchase. That’s not available in the e-commerce channel. In the e-commerce channel, merchants have learned to do things like capture device I.D., IP address, and other information that the customers generate as they’re interacting from a laptop or desktop computer. Now, when you move to mobile, some of those things necessarily aren’t there or they may change. And of course the customer experience of the checkout itself because of the different form factor of the mobile device requires that merchants change, in many cases streamline, the purchase process to simplify it to make it easy for that mobile purchasing. Merchants have to be careful that in the mobile experience that they’re capturing the important and necessary data that they will need to defend that purchase if and when there’s a dispute down the road. The other thing that mobile does provide that’s unique is that you can do an exact location of that mobile device in a real-world environment. So in the brick and mortar store you know that the purchase was made in a desktop scenario. You may know the household or the IP address. In the mobile scenario — if you think about a ride-sharing service — you can actually track the mobile device and see where that purchase was made, where the pickup was made, and that information is very valuable to the merchant in proving the purchase was legitimate.
This originally appeared in Payments Journal on March 6th, 2019.