A better solution to fraud and chargebacks than regulation – AI News Update

How best to handle payment disputes between cardholders and merchants is a controversial topic.

The issue is framed as a zero-sum contest where the needs of merchants must be weighed against the rights of cardholders. Conventional wisdom says that anything that benefits merchants must do so at the expense of cardholders, and vice versa.

Regulatory pressures from agencies such as the Consumer Financial Protection Bureau (CFPB) have largely ignored merchant views in favor of expanding cardholder protections. Unfortunately, this focus has consequences that continue to drive up costs for merchants and financial institutions caught in the crossfire.

Fortunately, technology gives us the opportunity to build a collaborative solution that benefits all parties without prioritizing the needs of one over the other.

The need for cardholder protection

Clearly, there are strong arguments for prioritizing consumer protection.

When the CFPB was established in 2011, its explicit purpose was to protect consumers from abusive and predatory financial practices. This was seen as a necessary repercussion in a post-2008 environment.

Protect consumers against fraud and abuse is the right thing to do. It also helps provide a strong foundation for the market as a whole. If consumers have confidence in their protection, they will be more inclined to transact online.

Cardholders have the right to ask their issuing bank to intervene by filing a chargeback, essentially a forced refund. This fundamental guarantee underpins much of the growth of the online market over the past two decades. You could say that without it, far fewer people would shop online with confidence.

For cases of genuine fraud, payment disputes should be easy to resolve and require minimal effort from cardholders. Adding undue friction or burdensome barriers would have downstream consequences for the entire e-commerce industry.

The problem is that as cardholders have become familiar with the dispute process, they have learned to abuse the system.

The problem of chargeback abuse

Consumers increasingly view chargebacks as the first course of action when trying to resolve an issue with an online merchant. Card issuers have made it very easy to dispute a charge, to the point that it is often quicker for the consumer to contact their bank than to contact the merchant with whom they are unhappy. It’s so easy, in fact, that many chargebacks are accidentally initiated by cardholders simply looking for information about a transaction.

This has led to a boom in friendly fraud, which costs merchants billions of dollars every year. A recent study found that friendly fraud was the most common fraud attack method for merchants in 2021, dropping from fifth place in 2019.

The current system also places a heavy burden on merchants who want to defend themselves against friendly fraud. The lack of standardization and the cumbersome requirements of many acquirers are intended, in part, to deter merchants from responding to disputes.

The LexisNexis “True Cost of Fraud” study estimates that merchants ultimately lose $3.60 for every dollar in direct fraud costs. This multiplier is in part due to the resources merchants need to effectively manage chargebacks.

The need for traders’ rights

The current chargeback system was codified long before e-commerce and online banking were concerns. Although there have been several updates to the chargeback process in recent years, the underlying logic has remained largely unchanged.

Under the current system, the burden of litigation falls overwhelmingly on merchants, and filing a response is generally difficult. Most banks still require paper documents and provide very little guidance on their format or other requirements. This can be, at least to some extent, by design.

When a merchant provides compelling evidence that the transaction was legitimate, that case must be investigated and handled by both banks. If the case is decided in favor of the merchant, the cardholder has the option of escalating the dispute. This is a manual process that takes time. The current system would collapse if most merchants responded most case.

This “strategic dysfunction” has deterred many merchants from defending themselves against illegitimate litigation, but it cannot be the ultimate solution. As friendly fraud becomes more common, it should be easier, not harder, for merchants to fight back.

The Merchant vs. Cardholder Fallacy

The common wisdom is that by placing too much emphasis on consumer protection, we ask merchants to accept chargebacks and friendly fraud as a cost of doing business. This imposes a financial burden on merchants which is invariably passed on to customers.

On the other hand, attempting to hold merchants accountable without re-examining the fundamentals of the dispute resolution process could put consumers at risk. The system could be overloaded and dishonest merchants could re-victimize cardholders who have legitimate complaints.

The way forward is not to try to protect one party at the expense of another. Rather, it is about developing strategies that meet the needs of merchants, cardholders and banks.

A technology roadmap

Modern banks are increasingly behaving like software companies, but payment disputes are still largely handled on rails built in the 20th century. Collaborative solutions and end-to-end data sharing can better inform chargeback decisions, streamline operational bottlenecks, reduce friendly fraud, and protect cardholders.

Here is an example: As artificial intelligence And machine learning are playing a bigger role in preventing fraud, accurate data to train these systems is becoming increasingly valuable. By discouraging merchants from responding to disputes, institutions lose critical data that could be used to prevent fraud.

If acquiring banks encouraged their merchants to respond to all cases, even if only to confirm actual fraud, it would provide institutions with a much more accurate picture of actual fraud. The current solution relies heavily on raw chargeback data, which includes both third-party “criminal” fraud and “friendly” fraud.

If more merchants responded to payment disputes, banks would be much better able to identify and prevent fraudulent transactions. There would be fewer cases of criminal fraud and fewer false refusals, which would benefit everyone.

The additional workload could be streamlined through modernization. Instead of relying on disparate, non-standard paper documents, the technology could allow merchants to transmit raw data in a globally standardized format. This would allow all parties to use automatingminimize errors and reduce the number of employees needed to handle disputes.

Additionally, chargebacks could be further reduced by increasing the amount of data available to issuing banks when handling disputes. A significant number of chargebacks are filed in error. Cardholders call their bank to inquire about a charge, and with little or no transaction information, the bank’s only option is to initiate a chargeback.

Currently, two technologies — Check order overview And Ethoca Consumer Clarity — give merchants the ability to share data with banks when requested by a cardholder. They have proven the benefits of data, but the programs are expensive and difficult for merchants to implement.

Increased data sharing, by default, should be the goal.

End the old, make way for the new

Finding a balance through technology is a “win-win” that benefits cardholders, banks and merchants. It should be the goal of all parties, including regulators like those at the CFPB, to advocate for technological solutions to our current problems.

Change won’t be easy and we won’t get results overnight, but the value of building a better and more viable system outweighs any costs. The more we focus on solutions that match the needs of merchants, banks and consumers, the easier it will be to resolve the few remaining conflicts.

The current system is unsustainable. It’s time to try new ideas.

Monica Eaton is the founder of Chargebacks911.