By Gabe McGloin, Head of International Merchant Sales and Business Development at Verifi
As e-commerce continues to grow in popularity, so does the risk of fraud – particularly as card-not-present (CNP) payments are on the rise. Indeed, the most recent statistics from the UK Cards Association (UKCA), found that the volume of debt and credit card purchases in the last ten years has more than doubled, because consumers are using more seamless and contactless methods of payment.
In addition to growth in CNP sales, contactless and mobile app payments have also led to further diversification of payment methods. According to the UKCA, of the 16.4 billion purchases made in 2016, 39 per cent were a combination of contactless and online payments, an increase of 15 percent year-on-year.
Ease of payment for customers is obviously considered a good thing for merchants, shortening the path to purchase. But it also raises a challenge for banks, as they are processing more and more requests for chargebacks.
What Are Chargebacks?
If you have ever experienced a fraudulent transaction in your bank account, it is likely that you have used the chargeback process as a means to recover the funds.Chargebacks are essentially the reversal of an outbound transfer of funds from a consumer’s bank account, line of credit, or credit card. They occur for various reasons, such as when a consumer returns a product but did not receive credit from the merchant. Other causes include non-receipt of merchandise, quality issues, or a merchant’s misrepresentation in marketing materials.
Chargebacks may also be referred to as disputes or claims and can only be issued in accordance with the rules and regulations set by the card schemes or payment brands. Rules differ between payment schemes such Visa and Mastercard versus alternative payment methods, i.e. Paypal.
The chargeback process serves to protect and return funds to a consumer.Credit card chargebacks were initially established as a method of consumer protection. This was due to concern over the ease of credit card theft and fraud.
A chargeback is initiated when a cardholder calls their card-issuing bank, rather than the merchant, to dispute a transaction. Cardholder disputes that result in chargebacks occur for reasons such as vague descriptors on bank statements, unintentional use of a card, and fraudulent activity. Often, customer confusion over what may be a valid transaction can result in unintentional “friendly fraud”.
As payment methods and marketing channels have become more diverse, there is more risk of customer confusion. As a result,instances of friendly fraud may increase. Friendly fraud most frequently occurs when a customer makes a CNP purchase, receives the good or service, and then contacts their card-issuing bank to dispute the charge – often claiming they did not make the purchase. This can be due to confusion over their billing statement, as charges are not always labelled clearly and the customer may have used a different payment method from what they remember, or they simply do not remember making the purchase at all.
Another aspect of friendly fraud occurs when a customer makes a dispute claim that seems believable, but in fact they are manipulating the system to recover funds on an otherwise legitimate purchase. With e-commerce continuing to expand, it’s vital that merchants of both big and small businesses be aware of how to spot friendly fraud and what steps to take to prevent it.
The ease of using the chargeback process has prompted a rise in customer staking advantage of the system to commit fraud and theft against merchants. It is therefore vital that merchants understand the chargeback process and how to prove a transaction has taken place, that goods or services have been delivered, in order to mitigate the risk of fraud and disputes.
The Chargeback Process
In order to fight fraudulent chargeback claims, it helps to understand the chargeback process – for most payment schemes the steps are as follows:
- The customer contacts their card-issuingbank and asks for a charge to be reversed.
- The bank reviews the request. If the request is considered valid based on the rules, a provisional credit is applied, or the bank may decline the request if there is not sufficient evidence to support the claim.
- When a provisional credit is given to the customer, the issuing bank will initiate a financial transaction using the card scheme network that involves collecting the funds from the merchant’s acquiring bank.
- At this point, merchants should be notified by their bank that a chargeback has been filed. The investigation into the chargeback really begins.
- Merchants will be asked to provide detailed documentation as evidence to help fight the chargeback, if they choose to do so. Such documentation includes: proof of purchase, transaction receipt, customer authorisation of the purchase,proof of posted refund and return policy, any details from conversations, emails, chats with the customer service team, saleconfirmation emails, and approval of the charge to the credit card. This information can be challenging to collect, but it is very important when proving that the chargeback is in fact chargeback fraud. If the merchant does not provide the compelling evidence within the time frame specified by the card scheme, they essentially “accept” the chargeback liability.
- If the merchant wins the case, based on the evidence provided, the customer will be held responsible for payment on the purchase. If the merchant loses, they will be expected to cover the cost of the chargeback and pay for any fees imposed on them by their bank and the credit card association.
- As of the 14th April 2018, Visa’s Claims Resolution (VCR) puts more pressure on merchants to get disputes resolved in a shortened time frame of 30 days. Previously, chargeback claims could take months to resolve,and merchants had more time to gather the documentation and evidence needed to fight the chargeback. It is vital that merchants have all their documentation in order, and work closely with their banks to ensure claims are resolved within the new VCR time frame.
As more payment methods become available to facilitate faster CNP transactions, security protocols and capture technologies can become outdated. To this end, e-commerce fraud has grown dramaticallyacross the board. It is imperative that merchants are prepared to quickly identify fraudulent chargeback activity from genuine claims, and ensure they have efficient processes in place to prevent and respond to disputes.
Merchant vigilance must remain a staple in customer service best practices to help ensure revenue protection and customer retention. Additionally, 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, minimize the negative financial impacts of fraud and friendly fraud, and help retain more sales.