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As transaction volumes grow ever larger, applying technology the right way becomes critical.
Chargebacks are the black sheep of the payments industry. While new technologies have changed the payments space dramatically in recent years, chargebacks have barely evolved. For both merchants and card issuers, they are still almost always handled manually, with individual disputes sometimes taking 120 days or longer to resolve.
As volumes climb, this presents a big problem: How can merchants and issuers leverage the incredible innovations that are transforming the payments space while still ensuring they’re giving both their customers and individual transaction disputes the close attention they need?
To find out, I headed to the Merchant Risk Council, and brought together two experts: Matana Soreff, vice president of risk and compliance at Melio, a business-to-business payments platform for small businesses; and David Garcia, senior director of payments and risk at FastSpring, a full-stack commerce platform for growth-stage software-as-a-service and software companies. Here are four big takeaways from our conversation:
- You can’t prevent chargebacks
It’s tempting to try to clamp down on chargebacks using the same preventive strategies employed to minimize conventional credit card fraud: identify likely fraudsters, then shut them out. That doesn’t work with friendly fraud, though, because “liar buyers” are hard to spot. They look just like your regular customers. Screen them out, Soreff explained, and you’ll wind up punishing countless honest customers, while losing significant revenues along the way.
Instead, have high-risk customers go through a slightly more involved sales pipeline that lets you gather the information and evidence needed to challenge a subsequent dispute. “If it does end up happening, you’ll have more documentation,” Soreff explains.
- Triaging chargebacks can backfire
Another common strategy as chargeback volumes soar is to prioritize the things your in-house team does well, while ignoring harder-to-win chargeback cases. That sounds like a reasonable strategy, Garcia says, but it can lead to companies giving up on large numbers of chargeback cases that were actually winnable. “We’ve found that you can win over half your liar-buyer disputes just by responding,” Garcia says.
Forgoing those chargebacks costs you money, but it also hurts your reputation. Let too many chargebacks slide, and you could get into hot water with your acquirer, and even lose your merchant account—or wind up on issuers’ “naughty list,” leading them to side with cardholders.
That can snowball, Garcia warns, with issuers coming to view your company as prone to chargebacks, and favoring customers even in friendly fraud cases you’d ordinarily have expected to win. Even as chargeback volumes climb, he says, it’s important to fight as many cases as possible in order to protect your business.
- Automation only gets you so far
The obvious way to handle chargebacks at scale is to automate your mitigation processes. But while automated software can allow you to contest huge volumes of disputes, it’s important to be realistic about the results you’ll get.
The reality is that fully automated systems generally have a low success rate because they apply crude rule-based strategies to gather evidence and fill out forms, rather than optimize for your industry, your business, and the particulars of the dispute in question.
The key, Garcia argues, is to use automation in ways that support, rather than supplant, human mitigation experts. It’s possible to streamline and automate the process of formatting chargeback paperwork in the way a given issuer requires, for instance, while still using expert insights and human judgment to ensure that the right evidence is being collected and deployed.
By building on human insights, rather than simply trusting machines to get the job done, you can achieve better results at scale. “That’s the power of machine learning,” Garcia explains.
- Keep your issuers happy
It’s also important to realize that the chargeback process is powered by people at every step of the way—including an issuer’s chargeback-resolution process. If you can make your issuer’s job easier by providing the right evidence in a timely way, you’ll build a reputation for diligence that will help you win more cases over time, and that can bring other important benefits to your company along the way.
By contrast, Soreff warns, if you make the issuer’s job difficult—say, by churning out low-quality forms based on crude automation—or if you fail to respond to chargebacks at all, you can damage your relationship with an issuer in ways that cause lasting harm.
It’s important to look beyond the cost of a single chargeback, and take a broader view of how chargebacks impact your business. “You’re leaving a lot on the table, but you’re also hurting your reputation,” Soreff says. “As a payment company, our reputation with the networks is almost more important than recovering the funds.”
The Way Forward
So what does it look like when you put these insights together? The key is to build a scalable solution that treats technology as an invaluable tool, but not as a silver bullet. It’s by applying tech in the places where it does the most good, and using it to support and augment the power of human experts, that you can create a truly scalable solution for chargeback mitigation.
That means, for instance, that applying a one-size-fits-all tech solution won’t help you to achieve scale in useful ways. Instead of cookie-cutter tech tools, it’s important to seek out tailor-made tech solutions that build on team members’ knowledge and experience, and that are designed and implemented with the specific needs of your industry and your company in mind.
Machine learning can be an incredibly powerful tool as you scale your mitigation capabilities, but it needs to be trained and structured based on the insights of real people who understand your industry and your business and also understand the requirements and preferences of the issuer’s team.
Add it all up, and it’s apparent that bringing fintech innovations into the chargeback space is the only way to scale and meet the needs of today’s merchants. But we need
to do so by remembering that there’s no substitute for expertise and experience when it comes to building out your chargeback-mitigation capabilities.
—Roenen Ben-Ami is co-founder and chief risk officer at Justt.
