Card schemes are getting tough on chargeback fraud. We look at how changes to dispute resolution rules reflect changes in trading patterns, payment trends and technology. Plus, how acquirers and payment service providers (PSPs) can use the changes for competitive advantage.
Chargebacks are as old as card payments. The return of funds to a cardholder’s account after they dispute a card payment reflects consumer protection regulations in many countries. But that doesn’t stop chargebacks from being the bane of a merchant’s life.
The chargeback process explained
- Cardholder contacts their issuer to query a disputed transaction.
- Issuer reviews the disputed transaction, asks the cardholder for an explanation of the problem and creates a formal dispute case via the relevant card scheme.
- Acquirer receives notification of the chargeback. If they have evidence to counter the chargeback, they submit it on the merchant’s behalf. If no such evidence is available, they ask the merchant to supply evidence.
- Merchant receives and reviews the chargeback, either accepting it if it is legitimate. Or challenging it if they have compelling evidence that they supplied the goods or service, refunded the customer etc.
- Issuer reviews the evidence received from the acquirer and decides on the case. If the evidence refutes the cardholder’s claim, the merchant wins. If the evidence does not refute the cardholder’s claim, the merchant loses.
- Cardholder and merchant are notified of decision. If either party disagrees with the decision, they may have the option to argue their case further via an arbitration process, depending on the circumstances of the case.
Chargebacks can cost merchants up to double the original sale amount. They’re out of pocket if they’ve already shipped the goods or provided the service. Plus, they incur all the administrative costs and hassle of dealing with the dispute, irrespective of whether they win or lose the chargeback.
For acquirers, chargebacks are an indicator of higher operational or credit risks. The card schemes closely monitor chargeback rates. So, exceeding chargeback thresholds could mean scheme fines, registration on chargeback monitoring programmes, bans on signing up new merchants and even the loss of an acquiring licence in a worst-case scenario.
However, some potentially significant rule changes from Mastercard and Visa could improve chargebacks for merchants and acquirers. The new rules reflect changes in trading patterns, payment trends and technology.
Background to the rule changes
eCommerce is booming. As a percentage of general retail, it was growing even before COVID closed physical shops and businesses. But lockdowns turbo-charged the shift from physical to digital retail, which persists post-lockdown. Global e-commerce grew by roughly 17% in 2021, McKinsey finds.
Meanwhile, the growth of online marketplace sales, subscriptions, and embedded payments, such as those on ride-hailing and food delivery platforms, is driving digital payment at the expense of physical cash. This led to a 19%-growth in electronic payment transactions in 2021, McKinsey data shows.
In particular, real-time, bank-account-to-bank-account payments globally rose 65% in 2021, according to ACI data. Combining bank accounts and mobile, Swish in Sweden, PromptPay in Thailand, and Pix in Brazil have taken instant payment mainstream.
Card schemes are acutely aware of the competitive threat from these new banks and mobile payments. They’re quicker, cheaper, and more attractive to sellers than cards, especially for domestic sales. And because they are ‘push’ payments, there are no chargebacks or PCI DSS requirements.
Balancing the scales
Mastercard and Visa are always looking to balance the customer experience of using cards with the merchant experience of accepting them. Plus, guarantee a level playing field between scheme participants – the issuers and acquirers.
As remote sales have increased, so have chargebacks, causing the card proposition to become somewhat unbalanced. Data from Visa shows that between 2019 and 2021, annual Visa card-not-present sales grew by around 50%, while card disputes rose by 30%. Merchants and acquirers bear a disproportionate share of these costs.
That’s especially as many of these disputed transactions are thought to be so-called ‘friendly fraud’, also known as first-party or chargeback fraud. This is when a cardholder disputes a legitimate purchase with their issuers to get free goods. Or refutes a valid purchase, such as a long-forgotten recurring subscription or a transaction made by a family member.
Friendly fraud could account for up to 75% of all chargebacks, according to Visa. And cost over $25 billion a year, says the NRF.
On this basis, chargebacks should no longer be seen as simply a cost of doing business. Engaging with merchants to successfully process and combat chargebacks can be a source of competitive advantage. That’s not only for merchants wanting to boost profitability but also for acquirers who want to develop value-added services for their merchants. We explain how Web Shield’s Chargeback Portal can help existing acquirer/PSP customers below. But first, we summarise the rule changes.
Summary of new chargeback rule changes
Mastercard is introducing a pre-dispute or collaboration stage to prevent disputes from becoming chargebacks. That’s because when cardholders dispute charges on their statement they typically contact their issuer instead of the merchant. However, as merchants hold the purchase details, issuers often lack the necessary information to adequately validate and resolve disputes quickly and efficiently.
The implementation is planned for early next year. As a result, issuers must file a collaboration request with Mastercard, prior to initiating a chargeback. Acquirers have 72 hours to respond to such a request before the dispute automatically becomes a formal chargeback.
Effective 15 April 2023, Visa is introducing new rules around ‘compelling evidence’ of cardholder participation. Merchants can provide details of a pattern of prior, legitimate transactions with a cardholder to protect themselves against false fraud claims. This includes core data elements such as user ID, IP address, shipping address and device ID.
How Web Shield can help
Web Shield has developed a plug-and-play chargeback management platform to help acquirers and PSPs to action and reply to collaboration requests before they automatically become chargebacks.
As Web Shield is an official Mastercard Collaboration Service Provider, our platform connects directly to Ethoca, a secure eCommerce fraud and chargeback protection company, and gives your merchants a way to review disputes for quicker resolution.
The Web Shield platform is quick, easy, and free for customers to implement, with little to no development work. Get in touch for a presentation and to find out how easy it is to implement your own branded dispute resolution management platform.