Payments on Fire

Episode 85 – It’s Hard to Communicate about Chargebacks – Keith Briscoe, Ethoca

eCommerce fraud rates are rising and that means more cardholders are seeing unauthorized charges on their accounts.

The cardholder remedy is to call either the merchant or the issuer to flag the problem. If the cardholder turns to the issuer to resolve the problem, the remedy is often an expensive chargeback for the merchant and a generally lousy experience for everyone.

eCommerce Merchant Pain

eCommerce merchants have invested heavily in fraud detection tools because in the remote payment domain liability rules make them responsible for fraud losses. eCommerce merchants employ sophisticated fraud management processes and tools to detect fraud in realtime to stop authorization (best in class fraud rates are 25 bps – 35 bps).

On top of that, they must eat the direct costs associated with stolen goods and services. These include a chargeback processing fee from the acquirer as well as the merchant’s internal costs to manage the chargeback process. If the merchant fights the chargeback, the merchant has to gather the supporting evidence (the receipt or copy of the order) and submit it to the acquirer.

Disputes and chargebacks re initiated by cardholders for a range of reasons including fraud, authorization, various processing errors, and consumer-specific disputes. Examples of consumer dispute codes include products or services not as described, counterfeit, misrepresentation, and failure to process a credit.

Issuer Pain

For issuers, disputes and chargebacks are painful, too. In the POS domain, issuers hold the liability for fraud losses. If a counterfeit card is used and the issuer authorizes the payment, the issuer owns that liability. Issuers also bear the customer servicing and communications costs as chargebacks initiate with the cardholder’s call to the issuer.

Consumers Game the System

Zero liability rules have taught U.S. cardholders that they don’t have to worry about fraud and that they have broad powers to dispute a transaction.

Knowing that, too many cardholders are taking advantage of these rules. Digital merchants, in particular, are suffering from friendly fraud (not exactly an accurate term) that occurs when a cardholder, for example, disputes the charges made by another family member. For some digital merchant, over half of their chargebacks are friendly fraud, purchases for which the cardholder is truly responsible but able to renounce (“It wasn’t me!”) because of the rules.

Such high chargeback rates carry other risks for these merchants. Once a merchant’s chargeback rate exceeds 1% of its transactions, that merchant is put on a watch list, a remediation plan, and faces the possibility of losing card acceptance privileges. High chargeback rates also increase authorization declines for the merchant, losing even more good transactions.

Card Network Remediation

On the face of it, there’s an asymmetry when it comes to liability. Merchants shoulder a large burden. With that in mind, both Visa and Mastercard updated their chargeback rules in 2018.

In a chargeback mitigating move, Mastercard recently announced an end to the automatic renewal of free trial subscriptions.

Timely Data Sharing

In other words, chargebacks are a pain. Steps to reduce chargeback cost and frequency are a Good Thing.

One approach is to speed up data sharing. For example, once an issuer determines that a transaction is fraudulent, a timely message to the merchant could halt a product shipment. While the rules would still make an eCommerce merchant liable for the chargeback costs, the merchant wouldn’t lose the cost of order handling, shipping, and the item itself.

Similarly, if merchants can share their cardholder fraud experience back to the issuer then that financial institution can adjust its fraud detection models and algorithms.

Such data sharing is the proposition of Ethoca, a firm that federates bank fraud signals from hundreds of major global issuers and connects to thousands of merchants in the developed world in order to share alerts and chargeback messages.

In this conversation with Keith Briscoe, CMO at Ethoca, we talk about the chargeback problem, hear some truly astounding chargeback stories (hackers aren’t the only fraudsters), and discuss Ethoca’s role in this space.