For retail customers, experience is everything. Whether booking the holiday of a lifetime or purchasing a new pair of shoes, customers are quick to judge merchants on the ease and simplicity of the purchasing process.
The rise of ecommerce and the breadth of choices crowns the customer king. Customers hold purchasing power and are quick to vote with their wallets. If a seller fails to meet expectations through poorly-handled customer service, or mismanaged complaint resolution, that merchant may very well wind up on the customer’s “no-buy list.”
Card issuers can also suffer reputational damage when chargeback disputes come into play. With the vast amount of payment options, it’s easy for a frustrated customer to switch payment cards, or to a completely different payment method.
The scale of the problem was recently revealed in The Chargeback Triangle, a research report by Verifi. The report found that 63 per cent of customers decreased their patronage with a merchant following a chargeback.
This illustrates the incentive merchants and issuers have to resolve disputes quickly, even if it necessitates catering to a customer who has made an error – or even submitted a fraudulent claim.
There are two ways of looking at this problem: first, we can see it as an unavoidable cost of doing business. The second and more equitable view is that retailing depends on each party in a transaction acting in good faith and with fairness. When we examined the impact of chargebacks on merchants and issuers, we found there is much that can be done to improve their experience in chargeback disputes.
Impact on merchants
The Chargeback Triangle found that merchants are at a distinct disadvantage when it comes to chargeback disputes. Not only do customers decrease merchant patronage due to associated chargebacks, but merchants are also burdened with two-thirds of total costs related to chargebacks.
In spite of the billions invested in the customer experience, errors can and do occur during the transaction cycle, products may not be delivered, refunds aren’t made quickly enough, or products are defective. These problems may or may not be the seller’s fault, but the impact falls disproportionately on merchants. In this age of instant communications, lost sales are only one of their worries, customers have no qualms about sharing negative experiences on social media or influential review sites. This means that even a single dispute can ripple out to a much wider pool of potential customers.
This has made a significant impact on merchants’ attitudes to chargebacks. The more challenging the dispute processes becomes, the more likely a customers’ ire will be stoked, and the greater the punishment inflicted on the merchant.
Conversely, when disputes are resolved after a single call, customers report minimal changes to their purchasing behaviour: 81 per cent report no change in their card usage, and 64 per cent report no change in their willingness to shop at the merchant where the dispute occurred.
Clearly, getting dispute resolution right can have highly positive reputational and financial effects on merchants. But it’s not sellers alone who stand to suffer from poor chargeback management.
Impact on issuers
Ensuring the customer is satisfied is a major factor in whether a customer will continue using the card after a dispute. This triggers issuers to provide temporary credits, which further burdens the merchant to prove a transaction was legitimate through the chargeback process.
Customers are generally willing to continue to use their card after a dispute as long as they are fully refunded for the transaction. In fact, for about a third of customers, use of the card notably increases. Perhaps this is because the issuer has demonstrated they are looking out for customer’s best interests. As the first line of customer contact in the event of purported fraud, the issuer is the party responsible for placing money back into a customer’s pocket.
Unfortunately, like merchants, issuers are forced to make a decision based on value, not on the objective truth of a dispute. Often, they deploy simple rules-based approaches, such as value thresholds, which often overlook real instances of fraud. Alternatively, issuers could invest in the personnel and resources needed to investigate these transactions. But this approach is expensive.
More than half (53%) of issuers believe it is too easy for customers to dispute transactions. By lowering the barriers to initiating a dispute, these organisations might be contributing to a growing risk of “friendly fraud,” alluding to legitimate transactions a customer disputes in order to avoid making payment. How can issuers reclaim some balance, while ensuring they maintain a great customer experience?
The adage goes “it’s not the crime that catches you, but the cover-up.” Similarly, in payment disputes, it’s less the original problem that’s damaging, but the way it was resolved.
When it comes to the customer chargeback experience, merchants are between a rock and the hard place. But this is where technology can really help. Remember, with the exception of “friendly fraud”, chargebacks often arise from easily-preventable errors that muddy the relationship between customers, the merchants they patronize, and the issuers they trust with their funds.
Preventing disputes and simplifying the resolution process is crucial if issuers and merchants are to retain the trust and patronage of their customers. More effective information-sharing between issuers and merchants could ease some of the friction. By enabling issuers, customers, and merchants to collectively review the transaction history, a speedy resolve could be reached, while effectively screening for friendly fraud.
Unfortunately, the current chargeback system seemingly pits merchants against issuers, leaving each to believe their interests are largely overlooked. Reducing the friction and cost of chargebacks will require greater real-time collaboration. Since each has a vested interest in the outcome, bringing all parties in the transaction to the table seems the most logical way to reach a timely and fair resolve, while minimizing the risk of friendly fraud.
2 Responses
Sadly we are seeing an ever increasing use of chargebacks to get items for free. So far this year, all but one of the chargebacks we have been stung with have resulted in zero communication from the buyer ( strangely we only ever get these from ebay customers!). We contact them via ebay and via their email addresses… but never get a single reply, except that once where the person was very appologetic about her card being missued and offered to cover any extra expense which we incurred ( we declined due to her honesty and politness and thought!).
You have to ask why if the chargeback were genuine why the person would refuse to communicate at all with us, even if just to confirm it is genuine? In all cases they kept the items, in some they were even signed for at the address…
I know that genuine issues can arise, but far too many are getting to know the various systems to get stuff for free, and this is yet more bad news for sellers. We have seen a increase year of year for last 4 years with this sort of thing. Not a huge issue compared with other questionable claims, but it is increasing regardless and there is very little you can do to proitect yourself against the loss, adn the admin fee that gets stuck to it!