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Chargeback mitigation tools

A chargeback, also known as a dispute, is created when a customer calls the issuing bank of their debit or credit card company, disputing a charge and asking for a credit. Essentially, the result of the chargeback is that the customer receives a refund.

Chargebacks may arise for a number of reasons including:

  • Not as described
    • The cardholder claims to have never received the goods, or the goods were materially different from their expectations
  • Not recognized
    • The cardholder has no recollection of what a charge in their bank statement relates to
  • Fraud
    • The cardholder claims they did not authorize the purchase, (e.g., their card information was stolen and used fraudulently)
  • Operational errors such as:
    • Duplicate billing
    • Incorrect amount billed
    • Refund which was promised but never received
  • Cancelled Recurring
    • The cardholder claims they cancelled the recurring charge with the merchant, but the merchant continues to bill their card

    A preferred solution

    Most merchants wish cardholders would contact them first, rather than the credit card companies. But the reality is that most consumers do not reach out to the merchant to resolve an issue directly before contacting their credit or debit card issuer.

    However, customers have been trained to call their banking institutions when a billing issue arises and the only way to protect your merchant account is to be proactive in managing disputes.

    The problem with a consumer going straight to their bank is that when a merchant has too many chargebacks, they risk entering a card brand chargeback/dispute program which can have a negative impact on their business and their merchant processing account.

    Merchants also risk lowering profitability due to increased fees and fines which can also eventually result in a card brand terminating your ability to accept their card. It is extremely important that merchants continuously monitor their chargeback levels and keep their merchant accounts healthy.

    For some merchants, it makes business sense to incorporate a chargeback management solution provider to assist with reducing chargeback and dispute levels.

    Chargeback management providers

    The two main players in the chargeback mitigation space are Verifi – a Visa Solution, and Ethoca – a Mastercard company. These companies have developed direct partnerships with the issuers which give merchants the ability to refund a dispute alert before it becomes a chargeback. As a result, these refunded dispute alerts are not calculated into the merchant’s chargeback threshold with the card brands.

    The way the chargeback mitigation process works for these two companies is that the Issuer puts the chargeback process on hold and waits for the merchant to send the requested dispute alert refund through. If the merchant does not refund the dispute alert request within 24 hours, the issuer will move forward with processing the chargeback.

    In some cases, the dispute alert can also keep merchants from shipping physical goods or continuing with providing a service, to limit fraud-related losses.

    The merchant’s role

    Both solutions also require that the merchant provide a response and communicate whether the dispute alert was refunded. This can be automated by a merchant through API feeds, or the merchant can choose to log into the solution provider’s portal directly to respond to the dispute alert requests.

    If a merchant does decide to go the manual route, they need to keep in mind that dispute processing occurs 24 hours a day, 365 days a year. So, they will need to have the necessary staffing to resolve these manual disputes in order to meet the 24-hour refunding deadline.

    Although a merchant may refund the dispute alert, it is important to note that this does not necessarily guarantee that the chargeback process will be stopped. If a chargeback is received on a refunded dispute alert, and the merchant can provide proof back to the chargeback mitigation company, the amount the merchant paid for the dispute alert will be returned to the merchant. A merchant should also keep in mind this can add complexity into the invoicing process.

    Agnostic solutions

    Although Verifi was purchased by Visa and Ethoca was purchased by Mastercard, both have remained card brand agnostic. Thus, you will find that there are cases where you will find overlapping dispute alerts which can drive up cost for the merchant. This issue is typically found with the traditional Ethoca dispute alerts and the Verifi CDRN alerts. The traditional alert is the process that Verifi and Ethoca have developed where they have a direct relationship with the Issuer.

    Over the past couple of years, there have been a number of card brand chargeback mitigation solutions developed. In order to participate in these chargeback mitigation solutions, a merchant must partner directly with Verifi and/or Ethoca or a third-party reseller.

    Ethoca – Mastercard pre-chargeback solution

    The Mastercard pre-chargeback process is like an ethoca alert in that you refund the pre-chargeback alert to avoid the chargeback. The benefit to the pre-chargeback process is that it is automatically done in MasterCom which is directly linked into both the Issuer and Mastercard’s system (as long as the Issuer is using the newest MasterCom platform).

    MasterCom Dispute Resolution technology assists in the handling of B2B and consumer disputes. The advantage this brings is that once a merchant issues the refund the MasterCom system blocks the Issuer from processing a chargeback. The MasterCom process of checks and balances makes this solution extremely effective in stopping the chargeback.

    Once a Mastercard pre-chargeback is refunded, the chargeback is avoided and is not counted in the merchant’s Mastercard threshold.

    This process does require that the merchant refund the Mastercard pre-chargeback alerts within 24 hours. This process can be set up through an automated API or can be done manually in the ethoca portal. Again, merchants that are handling their MasterCard pre-chargebacks manually through the ethoca portal need to make sure they have staffing available to manage this process.

    Participation in the Mastercard pre-chargeback solution requires that that the merchant provide Ethoca with the credit card descriptor for the merchant account it would like to have enrolled.

    Verifi collaboration with Visa Rapid Dispute Resolution (RDR)

    When Visa refers to the definition of Rapid Dispute Resolution (RDR) it is exactly that — rapid. RDR is unique in that the merchant does not directly issue the refund through its merchant account. Rather, the refund is driven by a set of refund rules that are defined by the merchant. The rules let Visa know in real-time whether the merchant is going to accept liability and refund or reject liability and allow the chargeback to pass though.

    When a merchant accepts liability by refunding the dispute, the chargeback is avoided and is not measured in the merchant’s Visa chargeback threshold.

    The merchant can set up a variety of rules to decision their RDR refunding upon. For example, a merchant can set up a rule to refund and accept liability for any disputed transactions in the amounts of $50 or more. The merchant can also set the rules to accept liability on transactions with unique identifiers that are passed through with the transaction.

    Merchants can see which RDR disputes have had the liability accepted and which ones were rejected through the Verifi CDRN portal. At this time, merchants cannot set-up automated API feeds for the RDR disputes but can manually download them through the portal.

    As far as tracking the actual refund dollars the merchant is refunding through the RDR process, the merchant will have to work directly with their processor. All refunding confirmations from Visa will be communicated through the existing chargeback rails established by Visa and the acquirers/processors. Visa will send the acquirer/processor a chargeback record as this process already removes the funds from the merchant’s account.

    Since each acquirer/processor will integrate this RDR process differently each merchant may have to track this activity differently.

    Participation in RDR requires that that the merchant provides Verifi with the BIN and CAID for the merchant account in which it would like to have enrolled. All rules will be setup individually by the BIN and CAID.

    Not only do chargeback dispute mitigation tools keep your merchant processing account healthy they can also protect your brand and ensure good customer experience.

    If you are a merchant and experiencing high levels of chargebacks, it is important for you to incorporate a chargeback mitigation strategy that is not only cost-effective for you but is also manageable for your company. If bringing these solutions in-house is not an option, you can always look to a third-party solution provider that is a reseller of Verifi and Ethoca disputes.

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