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Chargeback Management – It Can Make or Break Your Business

April 19, 2024


Chargeback Management in Payment Processing

Merchants and card providers bear the brunt of chargebacks while fraudsters exploit it. Chargeback management is critical for banks, payment service providers and FinTechs.

Chargeback is one of the few inescapable evils of payment processing. An FI can design the best payment solution, and yet not guarantee that chargebacks will never occur. Further, with stringent regulatory guidelines to protect customer interests, the overhead of repaying the customer to maintain quick turnaround and a good reputation while proving fraud falls on merchants. Dive deeper into chargeback risks and ways to mitigate them by optimizing payment processing flows with this blog

The 2023 Chargeback Outlook Report by Mastercard forecasts that the global volume of chargebacks could hit 337 million in 2026.

Chargebacks are a Necessary Evil

Chargeback rules require cardholders to contact the merchant and try to resolve the issue before calling the bank. But 52% of cardholders admit to filing a chargeback without attempting merchant contact.

The chargeback facility enables customers to claim refunds from the merchant upon dissatisfaction with goods or services, fraudulent transactions, or unauthorized deductions. Customers may also raise chargeback claims when cancelled recurring payments are deducted due to operational inefficiencies, or duplicate charges are debited for an authorized transaction. Additionally, technical errors and payment misinterpretations are also grounds for filing chargebacks.

The protection mechanism provides a safety net against merchant misconduct or transaction fraud. It instills consumer confidence in card-based transactions. While the chargeback facility is designed to protect customers from the ill effects of fraudulent or unauthorized transactions, it is often misused, hurting the stability of the financial ecosystem.

AMEX Updates CID Policy to Better Support Businesses

American Express, the payment card specialist, adjusted its CID (card identification) number mismatch policy to improve merchant experience. After the update, no CNP (card-not-found) cases with a CID mismatch will be processed. Often, merchants move forward with transaction approval even if the CID does not match but the transaction is authorized. When such transactions are disputed later, they fall under the CNP category. Earlier, merchants received a CNP chargeback if a dispute was raised for this scenario. With the new policy, American Express has shifted the chargeback liability to itself

16% of merchants consider fines and costs associated with chargebacks the biggest threat to business, while 9% believe it is customer attrition due to chargebacks.

Notably, AMEX is not alone. Mastercard has also partnered with Worldpay to improve merchant experience. The aim is to provide timely alerts and insights for merchants to make informed decisions and refine their payment and order fulfillment processes. This provides greater chargeback protection to merchants. They can now submit approved CNP charges even with CID mismatch, which is bound to elevate customer experience.

However, this opens up a new debate for banks and payment enablers to take on greater risk to improve merchant acquisition rates. However, with the rising rate of CNP and general chargeback fraud, small and medium-sized FIs might be unable to offer competitive services and lose significant merchant business due to the limitations of their risk capacity.

Chargeback Frauds

An internal report by Visa highlights that 75% of chargebacks are illegitimate. They can easily be traced to errors, miscommunication, or intentional fraudster-led exploitation of chargeback regulations.

Chargeback frauds are valid transactions that are disputed by the customer but cannot be proved as legitimate by the merchant. It is often called “friendly fraud.” It may be a result of buyers’ remorse, unsatisfactory quality of goods, or false claims of not receiving the service they had paid for. While proving such fraud is often possible, it requires extensive resources, adequate technology, and intelligent assessment systems to be in place from the time of transaction origination to the chargeback claim.

Proven Strategies to Manage Chargebacks for Merchants

The global chargeback costs to merchants and banks stood at over $238 million in 2023. The US held the lion’s share at 105 million, accounting for over 44% of the global chargebacks in 2023. This emphasizes the need to fortify chargeback protection measures. The key to reducing chargebacks is greater collaboration among payment providers, banks, FIs, and merchants. Integrated data sharing and employing advanced technology to bolster transaction error detection, without reducing authorization rates, is critical. While open banking is set to foster greater and more secure collaboration, having a strong technology infrastructure remains critical for every participant in the industry.

You Too Can Forge Strategic Partnerships

Banks, merchants, and payment enablers need experienced technology providers with deep understanding of the money movement space. The best way to navigate chargeback risks is partnering with a reliable services provider to drive your chargeback management initiatives. The top 4 things to look for in your chargeback solutions provider are:

  1. Chargeback resolution tools should swiftly provide confirmed dispute information. This information can be forwarded to the merchant to get a refund or cancel the order, averting the chargeback request altogether.
  2. Cloud-based managed solutions are the most suitable for the digital space. These are easy to integrate and update seamlessly without any downtime.
  3. Solutions with a larger data network to provide brand-agonistic insights and quick alerts from diverse card brands can be instrumental in reducing the chargeback volume.
  4. Automated dispute resolution processes with intelligent decisioning and fast notifications for manual assistance can reduce the workload of the customer support team and minimize the operational cost of managing chargebacks.

Through a proactive approach, the experts at Opus Technologies power FIs and e-commerce merchants to enhance protection against CNP transactions, counterfeit or lost cards, scams, and account takeovers. To ensure top-notch fraud management, we have partnered with Featurespace, a global leader in financial fraud management. We enable you to utilize adaptive and auto-learning analytics models to discover patterns, scams, and suspicious transaction flows or user behavior. Get in touch with our experts to learn more about how Opus enables you to reduce chargeback volumes and minimize fraud while elevating customer experience.

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