Monica Eaton-Cardone co-founded Chargebacks911, developing the world’s first end-to-end chargeback management solution for merchants. Here she shares her 4 chargeback management lessons that banks need to learn in 2021
Many businesses have struggled to stay afloat over the last eighteen months. Covid-19 brought a host of new challenges while also making it more difficult to navigate some preexisting processes. Take chargebacks, for instance.
Chargebacks have been an albatross around the necks of merchants and financial institutions for decades. In a post-Covid environment, though, chargebacks present greater risk than ever to the payments space. Merchants could be facing increased volume and supply chain interruptions, while banks contend with staffing and connectivity challenges.
That’s not to say we should despair, though. Financial institutions still have abundant opportunities to protect cardholders, prevent chargebacks, and help clients grow their business to take advantage of the rapid growth in card-not-present payments. The keys are to possess the right perspective on the topic of chargebacks, and to have the right strategies in place.
Here, we’ll cover four important lessons that institutions need to internalise to optimise chargeback management in a post-Covid market.
#1. Setting Clear Standards for Processes & Communication
The chargeback process has remained largely the same for years, despite rapid changes in the market. A lack of communication further hampers any effort to get the problem under control.
Issuers and acquirers each have their own internal practices and rule sets for managing disputes. This is incredibly confusing and frustrating for merchants. The lack of standardisation leaves gaps for invalid chargebacks (or “friendly fraud”) to slip by undetected. According to the recently published Chargeback Field Report, most merchants reported an increase in friendly fraud between 2018 and 2021, with the average increase sitting at 23%.
As an institution, the first step to address this problem is ensuring that all parties know what is to be expected in the dispute process. Acquiring banks should clearly outline processes for merchants to streamline dispute responses. Merchants need to know:
- The timeline on which they’re operating
- The specifics of each case
- Which documents are needed to submit an effective dispute response
- How to reply to the dispute
Issuers have some responsibility, too. They need to educate cardholders on when it’s appropriate to dispute a charge. They also need to impress on customers that contacting the bank should be a last resort. It’s faster and better for everyone involved if the cardholder and the merchant can resolve disputes directly.
#2. We Need Ongoing Merchant Education
Remember: card network rules change constantly. Most merchants don’t have the bandwidth to keep up with continuous and minute—yet impactful—changes to chargeback procedures.
Going even further, they really face challenges in translating those rule changes. While merchants have intimate knowledge of their operations, they often lack the broad perspective to see how changes in industry policy must translate to changes in their practices. It’s in the interest of financial institutions working with merchants to help them stay on top of these situations.
We recommend providing regular, updated information to help merchants stay on top of changes. Visa and Mastercard typically publish revised chargeback rules once or twice a year. When this happens, banks could consider providing a “cheat sheet” to merchants, giving them a quick, easy-to-understand rundown on all the changes that might impact their operations.
Banks could go a step further by devoting a greater share of their resources to ongoing education on chargeback and fraud management, plus eCommerce best practices. Optimising merchant return policies, for instance, is one of the most effective means of eliminating chargebacks.
The same goes for developing continuity plans for when unforeseen circumstances—like a global pandemic—arise. Lots of merchants saw a surge in chargeback activity tied to the Covid-19 outbreak. With more adaptable business continuity plans in place, merchants might have avoided millions of dollars in chargebacks over the last year.
#3. How AI Can Help
The chargeback process demands human oversight. However, adopting AI-enabled strategies based on machine learning could simplify processes.
Adopting a cloud-based AI approach to chargeback management at the institutional level could streamline chargeback processing and increase efficiency while reducing costs. It would eliminate redundancies during the chargeback decisioning and reconciliation processes. Banks could resolve disputes in a matter of hours (rather than weeks), with far more accurate decisioning to identify and prevent friendly fraud.
Introducing AI tools that help banks distinguish between legitimate and illegitimate disputes with precision would let financial institutions offer greater value to their merchant customers. They could analyse industry trends and consumer preferences with more detail and insight. Not only that, but the banks themselves could stand to save billions of dollars each year in processing costs, chargeback liabilities, write-offs, and card network fees.
This is not to say that machine learning is a perfect solution. Chargebacks are a complex, litigation-based process. Overreliance on automated processes can create more problems than they solve, leading to poor fraud decisioning without stopping any cases of chargeback abuse. If executed as part of a broader strategy, though, AI can help banks reallocate staff for greater efficiency, and allow closer collaboration at every stage of the chargeback process.
#4. Develop a Broader Strategy
This leads to our last lesson: no single tactic will be enough to help banks manage chargebacks effectively. It will take a combination of all the above.
A piecemeal approach won’t address the needs of financial institutions in a highly-integrated payments space. As we embrace new avenues in fintech, banks—and the vendors, processors, and platforms that work with them—must be ready to adapt to this new reality. It’s important for banks to watch for new developments and carefully consider how these impact their operations and policies. Then, respond by adapting procedures with an eye to their broader strategy.
The chargeback process is not responsive to the needs of merchants and banks in a digital market. However, the payments ecosystem continues to change. Minimising losses means reconciling these changes to existing chargeback strategies.