The rise in e-commerce fraud, combined with consumers’ increasing willingness to file chargebacks, has left issuers and acquirers scrambling to shore up their dispute management processes. With a complicated process that varies depending on the payment network involved, chargebacks have become a huge operational challenge for many merchants.

In a recent PaymentsJournal podcast, Cheryl Fitzgarrald and Kate Knudsen, Senior Program Directors at BHMI, and Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy & Research, discussed why chargebacks are an increasing concern for so many merchants—and what they can do to combat the problem.

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What Makes Chargebacks So Complex?

A chargeback allows consumers to dispute a transaction and request a refund for a variety of reasons, such as fraud, unauthorized charges, or dissatisfaction with goods or services. When a consumer initiates a chargeback, a detailed workflow process for handling the payment dispute unfurls. This process is meant to provide a standard method for dispute claim management.

One of the main reasons chargebacks tend to get complicated is the number of parties involved. There’s the cardholder, the issuer, and the merchant that sold the goods or services being disputed. There’s also the acquirer, which acquires the payments on behalf of the merchant. Finally, there are the card networks, such as Visa and Mastercard, that oversee the entire process.

“Most of our clients support a wide range of payment networks, from the global giants like Visa and Mastercard to regional players within the client’s own country,” Knudsen said. “Each of these networks comes with its own set of dispute regulations. And in the U.S., we’ve got federal regulations, like Reg E and Reg Z, to keep in check too. These regulations tend to be very stringent and lay out the requirements, process, and timelines for handling disputes.”

That means handling chargebacks can require not just a group of trained personnel but also flexibility.

“We’ve got a dedicated team focused on tracking every mandate from the networks and integrating them into our dispute workflows,” Knudsen said. “It’s a constant cycle of review and modification. We’re always poring over that mandate documentation and identifying the necessary changes to our workflows to ensure compliance. It is a tedious and meticulous process but one we’re fully committed to because managing disputes effectively and compliantly is vital to our clients.”

Driving the Increase in Chargebacks

Data breaches and hacking have resulted in more card numbers and consumer credentials for sale on the dark web than ever before. But other factors are also driving the increase in chargebacks.

 One is the growth in e-commerce merchants. It’s never been easier to launch an e-commerce storefront and sell products online, but many retailers focus on the site and not necessarily on customer experiences. Consumers often have a question about their bill and want to request a refund, maybe because something was damaged or didn’t arrive. And if they can’t find a way to connect easily with the merchant, they’ll contact their card issuer and initiate a chargeback.

Another factor is recurring billing that’s difficult for the consumer to cancel. Consumers often find it easier to initiate a chargeback with their issuer rather than weave through customer service at the recurring billing provider.

“Many companies find it difficult to invest the time and money required to continually analyze the ever-evolving mandate changes,” Fitzgarrald said. “But if they are not up to date, this results in penalties and claim losses. And many companies are still using legacy systems that require a lot of human intervention. For instance, some companies still use spreadsheets and manual processes that make it difficult to keep up with the regulation changes and the growing number of disputes.“

“Another area we see is on training,” she added. “It’s difficult to hire somebody with experience in chargebacks, and there is a high turnover in this area. Then you have the complication of the different networks involved with different rules and regulations.”

The Swivel Chair Approach

What many companies use is a swivel chair approach. This refers to the manual process of navigating back and forth between internal applications and external card network dispute systems like Mastercard Claims Manager and Visa VROL. The changing protocols and lack of automation and integration with the networks can lead to inefficiencies, errors, and unnecessary claim losses.

“Naturally, as the number of chargebacks increase, so does the overall cost of managing them,” Knudsen said. “And another reason that goes hand in hand with the increasing volume of chargebacks is that, due to the complexity and the ever-changing regulations, claim losses can be high. Many acquirers opt not to even pursue a certain portion of their chargebacks because of the cost and the complexity.”

Apgar noted that a lot of companies and merchants aren’t prepared for chargebacks. “They will provide customer service and answer a phone call or an email from a customer,” he said. “But if that transaction turns into a chargeback, the merchant hasn’t organized and categorized that data. They don’t have the information in one place and organized so that when the chargeback comes in they can provide a definitive story to the card-issuing bank.”

One of the most impactful things businesses can do is to streamline the management of disputes with consolidation and automation. Many companies juggle multiple systems and rules and processes, but there are solutions that allow companies to manage all disputes within a single integrated solution. This includes various transaction types, card-based and non-card-based, like account-to-account or peer-to-peer payments.

API integration is a game-changer here. The swivel chair approach can be replaced with two-way APIs that interface with Mastercard Claims Manager and Visa VROL. This automation streamlines the exchange of dispute data with these networks and eliminates the need for manual intervention.

When companies replace manual processes with preconfigured workflows that guide dispute workers through each step of the workflow, the percentage of claim wins dramatically improves—and so does employee satisfaction.

Self-Service Functionalities

Self-service capabilities are another cost-saving option. For example, a payment service provider could provide a solution that allows its merchants to access their own transactions and manage their own disputes.

“From a merchant’s perspective, the two most important things they can do is first to audit the customer journey, especially in the e-commerce world,” Apgar said. “Are the descriptions of the products accurate? Are the expectations being set in terms of when and how it’s going to be delivered?“

“Secondly, use a platform to organize and collect all the data that the merchant tracks. Most of the fraud prevention and other customer contact information comes from third-party systems. Keeping that information organized in one spot so that they can quickly respond to a chargeback and tell their side of the story is vitally important.”

With the proliferation of digital shopping, and particularly the growth of the subscription economy, retailers should expect chargebacks to continue to increase. As BHMI’s experience shows, anticipating that chargebacks will happen—and building the infrastructure to handle them—will be key to combating this erosion of profitability.

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