Neil Smith, Regional Head, Issuers EMEA & APAC at Verifi
Building and sustaining consumer loyalty is a high priority for issuers. Lose consumer loyalty and you lose business.
Consumers are progressively exploring the freedom to shop where they want, when they want, and how they want. The responsibility for understanding, implementing and managing payment channels lies firmly with merchants, but issuers should also have an understanding of these channels in order to better spot fraudulent transactions.
With consumers increasingly purchasing across channels, mitigating risk and stopping fraudsters in their tracks is becoming more of a challenge. Last year, in the UK alone, almost five million people had money stolen from their bank or credit card account, at a cost of around £840 each according to the price comparison site, Compare the Market. As fraudulent transactions rise so does customer confusion and payment disputes. As a result, chargebacks are fast becoming a serious threat to issuers – mounting to a $31 billion problem for the payments industry, according to a report conducted by Javelin Strategy & Research and commissioned by Verifi.
To ensure they maintain customer loyalty, issuers need to adapt to the expectation by consumers that their loss will be resolved quickly.
Challenger banks have proven to be nimble and consumers can opt to move providers quickly, should they be disappointed with their current banking experience. While many issuers understand the need to adapt to changing consumer preferences and create friction-free experiences, it can be difficult for them to do so successfully.
So, what are chargebacks?
Chargebacks are essentially the reversal of an outbound transfer of funds from a consumer’s debit or credit card. They occur for various reasons, such as quality issues with products, deliveries not turning up, or confusion on bank statement.
Usually, a chargeback is initiated when a consumer calls their card-issuing bank, rather than the merchant, to dispute a transaction. In fact, according to a Javelin Strategy & Research report commissioned by Verifi, consumers are increasingly leaving merchants out of the dispute process, initiating a fraud-related chargeback directly with issuing banks up to 76 per cent of the time.
Tackling consumer pain points
When consumers are confused by their card statements or question card transactions, up to 66 per cent of the time they blame the merchant for the problem according to Javelin Strategy & Research. In the majority of transaction disputes, consumers wish to deal directly with their card-issuing bank. However, eliminating merchants from the process means consumers are at a disadvantage dealing only with issuers, who lack the necessary transaction information to determine if the dispute is legitimate. Usually, an issuer will provide a temporary refund, which can serve to alleviate the concern over lost funds and improve loyalty to the issuer. However, the consumer is left assuming the merchant is responsible for the possible fraud. This in turn creates ill will and a reduction in merchant loyalty.
Further still, the issuer also risks losing consumer loyalty as they are admitting to processing a potentially fraudulent claim and only accept it by the consumer’s declaration. Continuing with this inefficient dispute process, costs are only set to rise for merchants and issuers which will ultimately be borne by consumers.
Although both merchants and issuers bear the risk of losing future business and damage to brand reputation following a dispute or chargeback, it is merchants who see the bigger impact on their bottom line. Unfortunately for merchants, the Javelin Strategy & Research report saw that 63 per cent of consumers decrease their patronage when they have encountered a negative chargeback experience. This is significantly higher when compared with the decline in card usage experienced by issuers. 43 per cent of consumers use their card less after a true fraud dispute and 39 per cent for friendly fraud disputes.
Some merchants resist challenging the chargeback and accept it as the cost of doing business, preferring instead to avoid conflict and keep the consumer happy. On the other hand, forgive and forget might not always be a good idea. Merchants generally bear significantly higher costs in the chargeback process. Fines, increase in operational costs, lost goods and refunds all combine to create inhibiting costs just to keep a happy consumer.
Mastering the chargeback process with collaboration
To proactively reduce or even completely eliminate chargebacks, it’s vital that merchants remain vigilant against credit card fraud as part of best practices for consumer service.
Innovations in the payment industry – such as solutions that facilitate better and more timely exchange of pertinent transaction or dispute data between the merchant and the issuer – can further reduce or resolve disputes more efficiently. Implementing a collaboration solution helps to minimise the negative financial impacts of fraud and friendly fraud, and retain more sales as a result.
Moreover, improving collaboration among merchants and issuers throughout the dispute process can also help to reduce chargebacks. Implementing steps such as providing clear billing descriptors and fostering order data-sharing between merchant and issuer can improve consumer loyalty for merchants and issuers alike. Such collaboration solutions can provide issuer call centre staff with access to transaction information from the merchant’s CRM system. Using this information, issuer staff can deflect disputed transactions and prevent a chargeback. The next line of defense for issuers is to implement a solution that pushes real-time dispute notifications to merchants, to review and resolve disputes faster to reduce time, resources, and costs associated with the chargeback process. Use of combined solutions can result in lowered overall dispute volume, reduced operational costs and inefficiencies.
The bottom line is that it is in the interest of all parties along the payment chain – for issuers, acquirers, and merchants – to implement improved dispute practices. Consumers are more likely to remain loyal if they encounter a positive brand experience, which will help both issuers and merchants to maintain customer loyalty – all as a result of truly mastering the chargeback process.