September 8, 2015
Back to the Basics: A CNP Payments and Fraud Primer, Part 4
By Karisse Hendrick, Editor-at-Large, CardNotPresent.com
As kids, many of us dream of becoming a fireman, a ballet dancer, a ball player or a pop star. A card-not-present payments and fraud professional? Not so much. For most, ending up in your current career was a happy accident. There are no college courses that prepare you to set up or manage CNP payment processing, nor are there are any standardized courses on fraud management. Because there’s no clear career path, everyone comes to their job with a varying degree of understanding regarding the plumbing of the industry.
At CardNotPresent.com, we often are asked for a basic explanation of the overall payments process by individuals throughout the ecosystem and at many levels of experience. A review of basic information can help merchants understand the partners they need and help providers better understand the role they play in the ecosystem.Last time we looked at antifraud technology and how to effectively evaluate fraud tools. Today, we take a look at the chargeback process. If this is a review for you, pass it along to someone you think it will help. We have developed an infographic to accompany this article you can print out and refer to often. If you don’t need it as a resource, someone in your organization does.
The Basics of CNP Chargebacks
The chargeback process can be confusing and frustrating for merchants. Mastering it, however, can not only decrease financial losses, but also improve customer service and create opportunities for process improvement.
The system was established by the card associations as a means to resolve conflicts between cardholders and merchants. And, while the rules are governed by each card network, they are established pursuant to the Fair Credit Billing Act and the Consumer Credit Act—federal laws explaining the rules regarding credit-card transactions in the U.S. and U.K. There are more than 100 reasons—each with its own reason code—a cardholder can cite to dispute a transaction, but they can be organized into three main groups:
- fraud-related chargebacks—when a cardholder claims that they did not participate in the transaction
- service-related chargebacks—when the cardholder is dissatisfied with the order (e.g., the goods were not received or the cardholder did not receive a refund they were due
- technical chargebacks—typically initiated by the issuing bank if something happens during processing (e.g., processing a transaction after an authorization is declined)
Chargebacks are a bigger issue in the CNP world than in card-present environments for several reasons. For most card-present fraud chargebacks, the issuing bank is the party responsible for repaying the cardholder while the merchant bears that responsibility for CNP transactions. Also, because products and services are not being exchanged at the time of the transaction, there tends to be more service-related chargebacks. And, because e-commerce is technologically more complex than traditional commerce, technical issues that cause chargebacks tend to occur more when the card isn’t present in the transaction.
It is also important to note that Visa and MasterCard present chargebacks differently than American Express and Discover. For the former, the funds for the chargeback are debited prior to or at the time of notification to the merchant. It is the merchant’s responsibility—through the representment process—to prove that the transaction was valid and then perhaps reversing the debit to their bank account. Most American Express and Discover transactions, on the other hand, start as a retrieval request, asking for the proof that the transaction was valid prior to the debiting of funds. It is important to respond to retrieval requests or first-time chargebacks from closed-loop networks immediately. Once the established window to respond has expired, the funds will be debited with no chance of reversal.
Responding to Chargebacks
In most cases, a merchant has 30 days to respond to a chargeback. Depending on how long the merchant processor takes to send the response to the issuing bank, it can be less. The likelihood of receiving a reversal of the chargeback depends on the chargeback reason code and the circumstances surrounding the original transaction. If a transaction was truly fraudulent, for example, the likelihood of receiving the funds is low. However, if the cardholder appeared to have participated in the transaction and there is proof of delivery to the address that received an AVS (Address Verification Service) match, that chargeback may be worth disputing. It is important to create a chargeback strategy that is right for your business, taking in to account the average transaction size, the overall volume of chargebacks, the type of chargebacks received and the overall operating expense of responding to chargebacks. Companies with a high volume of chargebacks across many reason codes have found that having a direct resource responsible for responding to chargebacks can be beneficial.
When responding to chargebacks, it is important for a merchant to know who will be determining if the response meets the requirements for that specific reason code. In most cases, the merchant processor’s chargeback department is responsible for making this decision. If they find that the merchant has provided sufficient cause, the chargeback will be represented to the issuer for reconsideration. At this point, the issuer has a chance to accept the representment, allowing the merchant to keep the disputed funds, or to issue a second chargeback. In most cases, if a second chargeback is issued, the merchant cannot dispute the charge any further. In very few cases, the processor may advise the merchant to pursue arbitration, with the card networks making the final decision. This process is costly and time consuming, and in most cases not worth the transaction amount disputed.
Understanding the Tools Available
Fraud prevention tools, which we discussed in a previous article in this series, in a way can function as chargeback-prevention tools because ultimately they are assisting the merchant in identifying which transactions should be canceled to prevent financial losses due to fraud chargebacks. However, there are also tools and services available specific to chargebacks. And, like general fraud-prevention solutions, there are more and better tools available now than ever before.
The only tool that provides preemptive chargeback-protection for fraud-related chargebacks is 3DSecure. When 3DSecure is initiated at the time of the transaction, and the authorization is approved, the merchant is no longer liable for any fraud-related chargebacks on those transactions. If a cardholder claims they did not participate in a transaction protected by 3DS, the issuing bank is the party responsible for reimbursing the cardholder for the disputed amount. 3DSecure does not, however protect the merchant from service or technical related chargebacks and concerns remain regarding how the technology affects conversion.
Pre-notification services are another chargeback-specific tool. The companies offering this type of service partner with issuing banks to alert merchants of disputes within hours of the cardholder starting the process. It can take up to two weeks for a merchant processor to be notified of a dispute and, in turn, notify the merchant. A pre-notification service gives that time back to merchants who can research the transaction and issue a pre-emptive refund prior to the chargeback actually being filed. This can be especially helpful in identifying fraud quicker and maintaining a low chargeback rate. Not all issuing banks participate in every service, and some are limited by the type of chargebacks (e.g., only fraud or service chargebacks), so it is important to find the right service for your business.
Because responding and managing chargebacks can be a full-time job, it may make sense to consider hiring a chargeback-management service. These companies receive chargeback notifications and dispute them on a merchant’s behalf. Because they focus solely on chargebacks, they are typically more aware of rule changes and have learned how to effectively dispute chargebacks to obtain a high reversal rate. Having a third party manage chargebacks can result in reducing associated costs, returning more funds to the balance sheet. Merchants that engage such a service shouldn’t just wash their hands of the entire process. Create a feedback loop that keeps you aware of fraudulent transactions that may have been missed and use it to improve processes that reduce overall chargeback volume.
An Ounce of Prevention is Worth a Pound of Cure
While chargebacks are not 100 percent preventable, there are many best practices that can minimize the loss in revenue due to cardholder disputes. Card network rules are designed to protect the cardholder, but they also promote efficiency and customer-focused payment acceptance. Take the opportunity to review total chargeback volume quarterly, breaking them into reason codes to see why customers are contacting their banks to receive a refund. An exercise like this enables merchants to identify what process improvements may need to be made. Also, make sure the chargeback team is communicating with the fraud team. This could help identify a new scheme or group that has been successful in getting past fraud prevention efforts. Learning from current losses prevents future losses and ultimately leads to maximum revenue retention and overall customer satisfaction.