As e-commerce continues to grow in popularity, so does the risk of fraud – particularly as card-not-present (CNP) payments are on the rise. Indeed, the most recent statistics from the UK Cards Association (UKCA), found that the volume of debt and credit card purchases in the last ten years has more than doubled.
In addition to growth in CNP sales, contactless cards and mobile apps have also led to further diversification of payment methods. According to the UKCA, of the 16.4 billion purchases made in 2016, 39 per cent were a combination of contactless and online payments, an increase of 15 per cent year-on-year.
While banks are diversifying payment methods to make the processes simple and convenient for customers, they’re actually creating pathways which can become problematic. The more methods that consumers can use, the greater the risk of fraud and chargeback claims.
What are chargebacks?
Chargebacks are essentially the reversal of an outbound transfer of funds from a consumer’s bank account, line of credit, or credit card. A chargeback is often initiated when a consumer calls their card-issuing bank, rather than the merchant, to dispute a transaction. They occur for various reasons, such as when a consumer returns a product but did not receive credit from the merchant or intentionally claims a legitimate charge was not valid to avoid paying – often referred to as “friendly fraud”. Other causes include non-receipt of merchandise, quality issues, merchant’s misrepresentation in marketing materials, or vague descriptors on bank statements that results in consumer confusion over what may be a valid transaction.
Unfortunately for both issuers and merchants alike, consumers are increasingly leaving merchants out of the dispute process, initiating a fraud-related chargeback directly with issuing banks up to 76 per cent of the time, according to a recent study by Javelin Strategy and Research. So, by the time a merchant learns of a dispute, it’s often too late to even begin a chargeback defence. By continuing the current inefficient chargeback process, costs will continue to escalate for merchants and issuers – with chargebacks already being a US$31 billion problem.
So, what are the key challenges facing issuers, and what can they do?
Issuers are in a difficult position when it comes to chargebacks – tasked with providing fast, efficient customer service while ensuring to prevent fraudulent activity.
Credit card chargebacks were initially established as a method of consumer protection. This was due to concern over the ease of credit card theft and fraud. However, the ease of using the chargeback process has prompted a rise in consumers taking advantage of the system to commit fraud and theft against merchants. It is therefore vital that issuers are able to efficiently collaborate with merchants to prove a transaction has taken place, and that goods or services have been delivered to help mitigate the risk of fraud and disputes.
If merchants are frozen out early in the dispute process, they are put on the back foot and must play catch up when investigating fraudulent activity. This gives fraudsters an opening to commit further criminal acts, creating a cycle of troubles that affect all parties in the payment cycle.
Consumers have low tolerance for a lengthy dispute process and are quick to abandon issuers and merchants. Highly sensitive fraud controls can trigger a false positive, resulting in declines for legitimate purchases. By the time this problem is discovered, the consumer is long gone.
Resolving the process
Most issuers and merchants would agree that the chargeback process is inefficient. However, they may not know that they have the power to make substantial changes that will reduce disputes and associated costs.
Unfortunately, the current chargeback system forces issuers to absorb significant operational costs and revenue loss, because they lack the data required to resolve consumer disputes. This creates an unhealthy ecosystem of dissatisfied customers, time-consuming arbitration processes, brand damage, and an increase in small balance write-offs that grow to large losses over time.
Optimally, the principal players in transaction disputes should work in collaboration to improve the current chargeback system. Issuers, merchants, and consumers must be willing to share vital transaction information to help resolve disputes before they become chargebacks.
The benefits of collaboration between merchants, issuers, and consumers can be significant. When the right party has the right information about a transaction at the right time, a dispute can be resolved before it becomes a chargeback. When that happens, everyone wins.
This article first appeared on FinExtra on September 18th, 2018.