By Patti Murphy
New and pending changes to Mastercard and Visa chargeback rules are ushering in a new era and will have far-reaching implications for merchants, particularly those selling in card-not-present environments, and merchant services providers. Card issuers, meanwhile, should come out on the winning side of the chargeback equation.
"Where issuers have been feeling the most pain is in the increasing cost of processing chargebacks and overall increases in chargebacks," said Monica Eaton-Cardone, co-founder and chief operating officer at Chargebacks911. The new and pending changes address those pain points, she said.
Eaton-Cardone likened the magnitude of changes in chargeback rules to the migration to EMV technology, except merchants won't have the luxury putting off compliance. "With all the new changes we really need to make sure that, unlike EMV, this is at 100 percent [compliance] as soon as possible," she said.
The challenge for acquirers, ISOs and merchant level salespeople will be in getting their clients up to speed on the changes and taking steps to help them avoid the pain of chargebacks. "Identifying chargeback problems and proactively educating merchants [on how to prevent and manage chargebacks] can be a differentiator, and everyone in the ecosystem will thrive," said Suresh Dakshina, president of Chargeback Gurus.
Chris Marchand, vice president for business development at the chargeback management firm Verifi, added, "Reducing chargebacks keeps a merchant's risk profile in line. A healthy merchant risk profile is important."
Marchand noted, for example, that it can take up to three months from the date of purchase for a chargeback claim to be filed. Given the rate of failures among small businesses, it's entirely possible a small business might fail before a chargeback is ever filed, leaving the ISO and/or acquirer on the hook for the chargeback claim.
Managing chargebacks is also good for a merchant's business. Merchants who track post-chargeback activity report that about six in 10 consumers reduce patronage following a chargeback, according to Javelin Strategy & Research.
The card brands' chargeback rules originated in the 1970s in part to encourage consumer adoption of fledgling card payment methods with assurances of zero liability for fraudulent transactions. However, over the decades chargebacks have become a huge money pit.
Since they know they won't be held liable for problem transactions, many cardholders have grown accustomed to filing transaction disputes with their card issuers rather than attempting to resolve problems directly with merchants. Indeed, 45 percent of consumers surveyed last year by Javelin said they had disputed at least one card transaction over the previous year; 25 percent had disputed more than one.
While a seemingly simple process for cardholders, chargebacks have become a major drain on resources and finances for merchants and issuers. Javelin estimates chargebacks were a $31 billion problem in 2017 – an amount equal to just under 1 percent of total U.S retail sales. About two-thirds of that ($19 billion) was spent by merchants, with 60 percent of those dollars spent managing chargebacks, not outright liability. Just over 60 percent of $12 billion in chargeback costs incurred by card issuers in 2017 was associated with liability for credit, debit and prepaid card chargeback claims, according to Javelin.
Chargeback management costs arise primarily from the litigious nature of the chargeback resolution process, which pits cardholders (as plaintiffs) against merchants, who must either plead guilty (accept chargebacks), or present information defending themselves against claims. Issuers have the final say (effectively sitting as judge and jury) unless the merchant loses, in which case the merchant can arbitrate through the card brands.
Although chargebacks can be legitimate, fraudulent chargebacks have become a worsening problem. ClearSale, which specializes in fraud prevention and chargeback management services for ecommerce merchants, estimates that 86 percent of chargebacks are probable cases of "friendly fraud," and these cases have increased 41 percent over the past two years. What's more, the firm said its data suggests roughly 40 percent of consumers who commit friendly fraud by filing bogus claims will do so again within 60 days.
Some chargeback frauds are inadvertent, as when a cardholder disputes a payment rather than seeking a refund from the merchant. Other so-called friendly fraud involves legitimate transactions that cardholders dispute to avoid paying for items purchased, for example, because they're suffering from buyer's remorse or because someone else in the household used their card without permission. Friendly fraud has become a major headache for merchants that sell through digital and other remote channels. Javelin estimates that friendly fraud is 34 percent more prevalent with these merchants.
But a significant share of chargeback fraud is malicious, as when cardholders falsely claim they did not purchase items or that items were never delivered, or when a card number is stolen and used for fraudulent purchases. Malicious chargebacks have become so prevalent in ecommerce some refer to it as "cyber-shoplifting."
"As merchants open up more channels [of commerce] unfortunately, one of the side effects we're seeing is a greater chance of fraudulent chargebacks occurring," Marchand said. ClearSale has identified six categories of merchandise that are most at risk of chargeback fraud.
Changes to chargeback rules and procedures are not new. At least once a year, Visa, Mastercard or both release new or revised regulations related to chargebacks, Marchand noted. But over the past year, the card brands have introduced major changes, many of which target ecommerce and other card-not-present merchants.
The Visa Claims Resolution (VCR) initiative, which took effect in April 2018, was the first big change. The initiative seeks to streamline and modernize the dispute resolution process to be more reflective of modern channels of commerce, to discourage frivolous dispute claims and thwart fraudulent claims. It includes new automated tools, new dispute categories, the consolidation of 22 reason codes into four, shorter allowable response times, and new procedural requirements.
One new tool uses rules-based models to automatically assign liability for chargebacks when possible, thereby reserving only the most complicated claims for human intervention. "It creates a more positive experience and makes it harder for people to game the system," Marchand said of VCR.
Visa said VCR will benefit merchants "by reducing some of the friction that exists within dispute processing, eliminating errors and erroneous submissions (which could reduce dispute volume by approximately 14 percent) and providing quicker resolution for disputes." Back in 2017, Visa said, the typical chargeback dispute took 46 days to resolve; the most contentious cases took over 100 days to resolve. The expedited resolution process ushered in by VCR aims to slash to 31 days the time it takes to resolve most disputes.
A survey conducted recently by Chargeback Gurus found the chargeback resolution cycle had been reduced to 30 days or less under VCR. Plus it found a 15 to 18 percent reduction in chargeback volume, and a 13 percent reduction in bogus fraud claims, Dakshina said. These results may not be representative of the overall state of chargebacks, however. Eaton-Cardone said her firm has not yet seen any measurable changes in chargeback loss rates. "Until [compliance] is universal and consistent we aren't going to see the best results," she said.
Chargeback Gurus also found many merchants were unaware of a key requirement under VCR: to acknowledge chargebacks by either accepting or disputing claims upon being notified of disputed transactions or risk fines of $0.75 to $2.50 per chargeback. "We found that merchants simply did not know what their acknowledgement requirements were with the new VCR process, and more troubling, they didn't know there were fees associated with those acknowledgment requirements," Dakshina said. Among surveyed merchants, just 12 percent were aware of the new requirement.
One major source of chargebacks in recent years has involved negative option billing programs. These involve consumers accepting "free trials" in exchange for providing their card details to cover shipping. Many are unaware that their cards will be billed on a recurring basis unless they cancel prior to expiration of the trial period. Often this is because sellers are less than transparent about how to cancel or when billing will begin. So they dispute these with their card issuers.
Mastercard took the lead in addressing the problem with a mandate that took effect in October 2018. Now, companies that employ negative option billing are classified as high-risk merchants, and acquirers must register these clients with Mastercard. Plus Mastercard created a new merchant category code specific to these companies.
Also, companies offering negative option billing now must contact cardholders before charging their accounts, informing them of the exact timing and amount of transactions, and they must provide written confirmation of cancellation requests.
Mastercard also implemented several changes specific to the chargeback dispute resolution process. Some changes, known as the Mastercard Dispute Resolution Initiative, took effect in October 2018; others are queued up to start in April and in October 2019.
The Mastercard initiative, like VCR, seeks to reduce the time it takes to resolve chargeback claims. Issuing banks, for example, now are required to request more information from cardholders before filing certain chargeback claims, such as those for unrecognized transactions, incorrect transaction amounts and recurring billing disputes. Mastercard said it expects requesting more information upfront will reduce cases of invalid chargebacks.
Under phase 2 of the Mastercard initiative, set to take hold in April, merchants no longer can initiate refunds once a chargeback has been filed, and support for refund transaction authorizations will be required from both issuing and acquiring banks. Mastercard also is eliminating some chargeback reason codes (such as late presentments) and slashing the timeframe for filing point-of-interaction error chargebacks from 120 days to 90 days. Beginning in April 2020, all Mastercard merchants (except airlines) will be required to initiate online authorization requests for every refund transaction.
Meanwhile, Visa is reducing its thresholds used to evaluate the chargeback risks of merchants, which determine whether merchants get enrolled in a fraud-monitoring program.
Understanding all the recent and pending changes in chargeback rules can be a tall order. "This has never been a core competency of merchants," Marchand said, adding that "some merchants look at chargebacks as a cost of doing business." That's not going to cut it anymore, however, considering the new mandatory acknowledgement requirements and lowered thresholds for mandatory placement in fraud monitoring programs.
"Acquirers and ISOs need to get up to speed on how these changes are going to affect their [merchants], especially if they have a lot of card-not-present merchants," Eaton-Cardone said.
"There is always a lot of speculation and confusion when new mandates take effect. Many merchants can't make sense of them," said Dakshina. "It's the responsibility of the ISOs and payment processors to work with merchants."
He advised acquirers, ISOs and their sales partners to conduct webinars to educate clients about the new chargeback rules and procedures. He also recommended working with clients to analyze chargeback activity to identify policy and operational changes that can help reduce the chances of chargebacks.
Better understanding will become increasingly important as more businesses adopt recurring billing or subscription models, which today make up a disproportionate share of chargeback claims, Dakshina added. "A lot of merchants are getting into subscription models, and we expect that trend to continue," he said.
Patti Murphy is senior editor at the Green Sheet and president of ProScribes Inc. Follow her on Twitter @GS_PayMaven.
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