We haven’t done a whole lot of work on the podcast exploring chargebacks or the new approaches to authentication. How does fintech improve the conflict resolution process on credit card payments? Total costs associated with chargebacks can add up to nearly 10 percent of a merchant’s total payment costs. A recent report published by Javelin tallied that consumer disputes and chargebacks created $31 billion in financial losses in the US, with merchants bearing nearly $19 billion of those costs.
To understand what’s happening and what technology can do to improve the chargeback problem, Rick Lynch, senior vice president of business development at Verifi joins me on the podcast. We discuss the issue, the misaligned incentives in the industry, and different approaches to solving the problem.
The chargeback problem
The challenge we’re facing currently is that ecommerce is driving more payment volume to the card not present channel. You’re seeing the majority of transactions occur in a non face-to-face environment. So, the traditional methods used to authenticate a customer don’t work as well. It’s easier for fraudsters to do what they do.
There is friendly and criminal fraud. In some cases, it can be 50/50. Consumers are more inclined to look to a bank to solve a complaint, as they consider contacting a bank the path of least resistance to solve a problem. Card issuing banks have promoted that they offer zero liability, great customer service, someone to answer the phone in seconds — they’re generally very willing to resolve a consumer conflict. The banks have become the de facto customer service center for merchants because consumers don’t want to contact a merchant and get pushback.
Quantifying the issue
Typically, chargebacks account for a half a percent or one percent of a merchant’s business. That sounds kind of small. But the related costs associated with chargebacks can run up to ten percent of the merchant’s payment costs. This hits profitability. The damage chargebacks cause is outsized compared to the actual numbers.
Approaches to solving the chargeback problem
Merchants have a number of technologies they can employ — some more human in nature and some more technical. There are two phases you can address the problem. The first is pre-authorization before you bill a card, trying to assess the quality of the customer before you accept payment from him.
The other is post authorization where Verifi has contributed to creating this category. Most other solution providers have focused on pre-authorization. We don’t want to turn away a potentially good customer. When you have pre-authorization, you take a risk that someone you turn away could have been a good customer. There’s a balance.
Reducing chargebacks post-authorization
Much of the complaint volume is driven to banks’ customer service centers. We’ve partnered with eight of the ten largest card issuing banks. Probably 70 percent of the banks issuing major cards work with us. Our goal is to go to the point of the complaint, connecting with the bank after they’re received a complaint from a consumer but before it’s filed a chargeback. We take the complaint, route it to the merchant, and give the merchant a chance to resolve the complaint before it becomes a chargeback.
We’re really getting the merchant, bank and consumer to work together on this. What we’re finding is the majority of the time, a consumer says I don’t need a chargeback, the merchant can keep the funds. If there is true fraud, we accelerate the resolution of the fraud and the refund to the customer.