The ‘Indisputable’ Power Shift in Card Disputes
Written by Sriram Natarajan, President of Quinte Financial Technologies
The payment industry will be witnessing a further tilt towards the merchants. It is no secret that with Compelling Evidence 3.0 or CE3.0, banks are grappling with apprehensions about the new Visa rules and how they may impact their customers.
Will This Mean a Multistep Change in Strategy?
Visa’s Compelling Evidence rules for card disputes taking effect from April 2023 will herald a new era in the issuer, acquirer, and merchant power balance. Over the past two decades, card issuers/networks and merchants have engaged in battle on two fronts; interchange fees and chargeback. The card networks, Visa and MasterCard, have tried to keep the balance between the two sides and keep the regulators at bay. A fundamental shift is already taking place in the payments industry. Digital banks, FinTechs, and e-commerce leaders and innovators fuel consumer expectations for greater convenience and more consumer-friendly engagement methods.
In parallel, the new digital ecosystem provides customers with a wider variety of payment options leading to greater choice and redefined competition among service providers. Payment industry players – issuers, acquirers, processors, payment gateways, merchants, and FinTech have been working on a strategy to address the changing customer needs in the digital payments landscape, fundamentally reshaping how they deliver services.
To put things into perspective, The new Visa Compelling Evidence Rules CE3.0 is an initiative to update rules allowing the acquirer (merchant) to show at least two undisputed transactions. The transactions should be from the same cardholder and occurred over 120 days prior with similar characteristics. This is to prove that the current charge in dispute is valid and does not warrant a chargeback.
Under these rules, Visa will look at four core data elements in the transactions to determine the validity of the disputed transaction:
· Cardholder’s IP address
· Device ID/fingerprint
· Email address or customer account login ID
· Physical shipping/delivery address
Of these four data points, two must match to prove transaction validity, and one of the two data points must be the IP address or device ID. The prime target of these new rules is to counter ‘friendly fraud.’ With friendly fraud now estimated to be a $20 billion problem, it is no longer tenable for the acquirer ecosystem to absorb these avoidable losses. While the acquirers will need to upgrade their systems to be compatible with these new rules, we also see some ground-breaking implications for issuers.
The Immediate Critical Challenges
Repositioning the disputes and chargebacks ecosystem will take a lot of work. Significant cultural and technological challenges exist in transitioning to a more merchant-leaning operating model. The strategic shift for an undertaking revolves around five essential elements.
Integrated Practices: Dispute management can no longer afford to be on ‘auto-pilot,’ reliant on IT systems and manual “workarounds” tuned to timely resolution for cardholders. Issuers have been working on a framework that puts the burden of proof on the merchant by raising a pre-dispute or a chargeback. This framework will now need to be supported by agile systems allowing data aggregation and reporting across all transaction elements.
Consistent Data Quality and Integrity: The success of a dispute resolution process for an issuer lies in speedy credit to the cardholder for the disputed amount and is defined by the success of efforts to utilize the chargeback rules on time. Ultimately, the quality of the data underpinning the disputed transactions in the new reality will be a critical deciding factor for merchants. The essence of the rationalization effort will be to create a unified data platform with newly upgraded metrics, ensuring that the changed rules lead to lower losses for merchants and issuers.
Shake Up in Customer Experience: Issuers will now often have to contend with the trade-off between customer dissatisfaction and being unable to get credit for a dispute and absorbing the write-off of disputed transactions that cannot be passed on to the cardholder. Issuers will have a Hobson’s choice as they will see more disputed transactions bouncing back from acquirers with ‘compelling evidence.’ Do they risk annoying cardholders who will have to pay or make provisions for additional write-offs for fraud? Issuers also must be prepared for worsening NPS and customer experience scores.
Risk-adjusted Customer Relationship Management: Issuers must now develop risk-based performance measures that help manage the shakeout in the relationship with cardholders. These measures must ensure the relevance of risk analysis in identifying cardholders who are perpetrators of friendly fraud. This adds a new behavioral dimension to the riskiness of each cardholder and has nothing to do with the traditional credit risk, which is dominant in risk management.
Agile Resource Allocation with Human Intervention: Enhanced agility is necessitated in resource allocation as increased data requirements and scrutiny of transactions demand a more precise alignment of strategic goals. If a common theme runs through the new reality, whether from internal working or via customer interfaces, it is the need for a new working risk culture. The new working risk culture will help create an environment of optimal process management.
In summary, issuers and acquirers/merchants must return to the new reality of a significant power shift. The bigger challenge lies with the issuers as the balance of power is now tilting away from them and requires a radical change in their outlook toward cardholder relationships. If issuers gear up to face a new reality, they can avoid straining their customer relationships and bearing additional losses.
The cardholder disputes and chargeback ecosystem are under considerable strain due to the burgeoning growth of online payments to support the tremendous growth of e-commerce transactions. Online merchants have always felt that the rules of engagement on cardholder disputes and chargebacks are loaded in favor of the issuers and cardholders. This is large because of the operating rules of Visa and MasterCard that are more leaning towards authentication and verification of online transactions; in the absence of this, the merchants invariably absorb the loss arising from a cardholder dispute.
