By Patti Murphy
Chargebacks are a multibillion dollar threat to the integrity of card payments. Mercator Advisory Group estimates there are 25 million disputed transactions each year, and that number will likely grow to 33 million by 2022.
While 25 million may look like a drop in the bucket of the 49.9 billion credit card payments made in the United States last year, the problem can be more severe than the numbers suggest. For example, a recent action by the Consumer Financial Protection Bureau, which is responsible for enforcing consumer protection laws, took action against Providence, R.I.-based Citizens Bank N.A. for not properly managing and responding to credit card disputes and billing errors.
A complaint filed in Rhode Island federal court in January 2020 alleges, among other things, that the bank automatically denied customer claims of unauthorized use of their credit cards and of billing errors. The bank also allegedly failed to apprise customers of the status of their disputed transaction claims, and to refund finance charges and fees when chargebacks were resolved in favor of customer. The CFPB is seeking an injunction against the bank, customer refunds and civil money penalties. (Citizens, in a statement said it will "vigorously challenge" the CFPB's action.)
"Dispute management is a critical card function," said Brian Riley, director of the credit advisory service at Mercator. "The Consumer Financial Protection Bureau's recent focus on unresolved dispute requires every issuer to take this matter seriously."
But it won't be a cakewalk. "While the increase in disputes volume is already a recognized problem in the payments industry, understanding the greater complexities involved and finding effective resolution tools and strategies to manage the issue is proving challenging," said Dr. Lynne Baldwin, president of BHMI, which provides software supporting back-office processing of electronic payments.
The complexities are magnified by ever-changing card brand rules around chargebacks, which can prove difficult for merchants and issuers to keep up with, Baldwin noted. "Visa and Mastercard are very aggressive in making changes to the disputes process," Baldwin said. "They are introducing [chargeback] rule changes about once a quarter." She added that issuers, merchants and acquirers "have to adhere to the changes or they lose."
The card brand rules governing chargebacks date back to the 1970s and were designed to encourage consumer adoption of fledgling card payment methods by assuring them that they wouldn't be left holding the bag for fraudulent transactions. As Mercator put it, "Irrefutability is essential in payments. Transactions must align with purchases made by authorized users."
Card brand rules require speedy resolution of disputed transactions, as do several consumer credit laws, like the Fair Credit Billing and Truth-in-Lending acts. Disputes can fall into any one of four categories: 1. Outright fraud; 2. Authorization failures, where the merchant failed to follow acceptance rules; 3. Processing errors, in which a transaction is not properly documented by a merchant; or 4. Customer disputes that can arise, for example, because the consumer doesn't' recall the purchase, or the purchase doesn't meet their expectations.
Historically, chargebacks have represented about four to six basis points of the total value of transactions, or about $209 billion of the $4.18 trillion in sales that are expected to be rung up on credit cards this year, according to Mercator's projections. But that number is sure to rise as more cash transactions migrate to cards, the consultancy noted.
Chargebacks related to ecommerce and other card-not-present transactions have already shot up, largely due to the implementation of EMV security at brick-and-mortar establishments. The lone holdout in the move to EMV – pay-at-the-pump gas stations – also have become favored targets for fraudsters. "There's a lot of fraud going on at gas pumps," said Suresh Dakshina, founder and president of Chargeback Gurus.
Card skimmers are a big problem, as the devices are easy to install at unattended pumps. The U.S. Secret Service said its agents seize about 20 to 30 card skimmers a week, primarily from gas stations. Skimmers aren't the only fraud threats at gas stations, however. One chargeback scam Dakshina has seen involves a driver paying at the pump for $20 in gas, then turning around and doing it again using the same credit card (but perhaps with a second car) at the same pump, then disputing the second transaction as a duplicate.
The threat to gas stations is concerning enough that Visa issued a pair of security alerts in December 2019. The alerts pertained to ongoing threats posed by skimmers, as well as by organized gangs engaging in "more technically advanced threat campaigns" infiltrating the POS systems of non-EMV-compliant gas-stations and pilfering card data. "[T]he recent attacks display a continued interest in obtaining track data from targeted brick-and-mortar merchants," Visa warned.
Gas stations were given five additional years to comply with changes to EMV rules that required all other brick-and-mortar businesses to use EMV chip readers or assume liability for any resulting fraud. That grace period ends this October. The impetus for gas stations to comply is that fraudsters will continue to target magnetic stripe readers to compromise to perpetrate card fraud as long as the readers continue to exist, Dakshina said.
Visa introduced a service called Visa Transaction Advisor, which allows gas stations to tap into Visa's global risk intelligence network and can determine the risk of a transaction within milliseconds based on cardholder and fraud trends. The service is available through acquirers, or directly through Visa for large gas station chains. Putting a price on the problem The true cost of chargebacks to merchants is much greater than the data might indicate. It includes time spent dealing with chargebacks, non-refundable chargeback fees (assessed by acquirers whenever merchants incur chargebacks), and the potential of being deemed a "high risk" merchant, which pushes up total cost of acceptance.
"Depending on the complexity, a dispute of a $10 item can require the same resolution effort as a dispute of a $1,000 item," Mercator noted in its recent Chargebacks and disputes: strategic solutions report.
Javelin Strategy & Research put the total cost of chargebacks at $31 billion in 2017, and estimates that for every $1 charge disputed by a cardholder, merchants and issuers, combined, incur $1.50 in added costs. What's more, a 2018 survey by Javelin revealed that 63 percent of consumers reduce merchant patronage following a chargeback incident.
There's also the very real possibility that successful chargebacks will embolden cardholders to file additional chargebacks. "Our data indicates that if a consumer files a chargeback and is successful, 50 percent of the time they will file a chargeback again within 60 days or less," said Monica Eaton-Cardone, chief operating office at Chargebacks911.
Visa and Mastercard regularly issue changes to chargeback rules, but the card brands have made significant changes over the past few years to streamline and simplify procedures around chargebacks. The card brands also have taken aim at so-called friendly fraud, which involves bogus chargeback claims, perhaps because the cardholder suffers from buyer's remorse or perhaps because another member of the household used the card without permission.
Recent changes include new automated tools and dispute categories, a massive consolidation of dispute reason codes, dramatically shorter allowable response times, and new procedural requirements.
Visa, for example, now uses rules-based models to assign liability for chargebacks for routine cases, dramatically reducing the number requiring issuer and merchant staff resources to resolve. "What they [the card brands] have been trying to do is automate the process so that things happen more online and in real time," Baldwin said.
Two resources created recently to address friendly fraud are the Visa Merchant Purchase Inquiry and MasterCom programs. They offer software tools that provide real-time data exchanges between issuers and participating merchants.
Visa estimates about 3 million chargebacks are initiated each year simply because cardholders don't recognize transactions, which commonly occurs in ecommerce. VMPI and MasterCom address this by automatically providing issuers (and by extension the cardholders) with details about a transactions (such as product descriptions and shipping confirmations) in response to initial inquiries filed. "It makes the issuer be more aggressive in validating transactions," Baldwin said.
And the strategy appears to be working. "We have merchants utilizing VMPI, and for those merchants we've seen reductions in disputes of up to 50 percent," Dakshina said.
While tools like VMPI and MasterCom and changing chargeback rules may be helpful, Eaton-Cardone expects friendly fraud to continue unabated, particularly in ecommerce. "It used to be that about 50 percent of chargebacks [in ecommerce] were friendly fraud; now it's upwards of 75 percent," she said.
One reason is what Eaton-Cardone describes as "an overarching sense of entitlement" on the part of consumers. Ecommerce sites like Amazon have conditioned consumers to expect instant gratification, and if they don't get it from the products and services they purchase, they often turn to their banks for recourse.
She added that the problem could worsen as fears of coronavirus spread, forcing airline and cruise ship cancellations and consumers to reevaluate travel plans. "Imagine being a consumer who has saved money to book a trip, only to have to cancel and discover there is no refund policy. It could well result in a chargeback claim," Eaton-Cardone said. "It's an unfortunate situation. There's legitimate pain on both sides." But if airlines and other travel services providers don't defend against these types of chargebacks, they run the risk of encouraging such friendly fraud, she suggested.
Card issuers and merchants can discourage friendly fraud by ensuring that filing chargebacks is not an easy or costless process, Eaton-Cardone pointed out. Issuers, for example, could assess a cardholder fee or fine when a merchant successfully defends against a chargeback.
Merchants, for their part, should take a more "tactical approach" to fending off chargebacks, she added. Elements of such an approach might include making return policies easily accessible from every page of their websites; offering fast shipping, along with tracking and delivery confirmation; providing bonus credits to customers willing to exchange goods for store credit; and prompt and always on (24/7) customer service access.
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the Fourth Estate. Follow her on Twitter @GS_PayMaven.
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