My last post put forth the idea that the chargeback process, created in 1968, needs to be overhauled. Chargebacks should embrace the improved communication tools we have today by putting the buyer and merchant into a conversation even after the chargeback is initiated. The prior blog post addressed the what (the need for change) but not the how. Today, I’d like to focus on the how.
The “What” of the Chargeback Process
First, a quick summary: in today’s chargeback process, the card holder begins the process by calling the number on the back of their card and telling their issuing bank they want to file a chargeback. The merchant is then notified about the chargeback by their merchant services provider. The communication between the buyer and seller is totally intermediated by these middlemen. This was probably the most efficient design back when the chargeback process was originally created, but now this kind of shuttle communication is very inefficient and frustrating.
Merchants, in particular, have few good options when a chargeback is filed. They can reach out to the buyer directly to communicate with them (maybe clarify the nature of the charge, or provide a tracking number) but once a chargeback is filed the buyer cannot unilaterally cancel it.
Here’s an example of how the current chargeback process can go:
Step 1: the cardholder sees an unrecognized charge on her credit card statement and either calls the 1-800 number or goes to her My Account page to initiate the chargeback.
Step 2: the issuing bank reverses the funds and emails the merchant to inform him of the chargeback.
Step 3: the merchant is presented with a choice: 1) accept the chargeback and lose the sale as well as the cost to purchase the item wholesale and ship it (AND pay a penalty fee); 2) challenge the chargeback by representing the charge and furnishing evidence that the charge is legitimate.
Too often, merchants choose option one, even though they may believe the chargeback was not justified. The headaches (and low win rates) for representments urge merchants to just give up. And even though the merchant and buyer can still communicate with one another if they have each other’s email addresses, once the buyer makes the fateful decision to initiate a chargeback, the buyer and merchant are no longer in control. In an era when technology enables frictionless communication with just a swipe of a finger, this lack of choice for merchants is not acceptable.
The Key to “HOW” Lies in Using Existing Technology
So, HOW should the chargeback process be updated to enable better communication and fairer outcomes, while at the same time satisfying compliance requirements and protecting parties from actual fraud?
First, we need to leverage the power of technology to enable buyers and sellers to communicate proactively about transaction problems, and to find solutions prior to resorting to chargebacks. Buyer should be able to notify merchants about their concerns and get quick answers. Chargebacks should always be a last resort, only after extensive direct communication was unable to resolve the concern.
Second, if the buyer is unresponsive, the seller should be able to provide information to the buyer’s card issuer regarding the transaction. Then, if the buyer attempts to file a frivolous chargeback, the issuer would be able to push back on the buyer based on the information shared by the seller.
Here’s how a new chargeback process could work step-by-step:
Step 1: the cardholder reaches out to the card issuer via the 1-800 line or her My Account page, and instead of the chargeback process formally beginning (and the ten-foot concrete wall going up between the buyer and merchant) the two parties are brought into a pre-chargeback discussion online (a “Resolution Room”) where, within short period of time, they can discuss how to get the issue resolved.
Step 2: the buyer asks a question of the merchant (e.g. what is this charge for? Or, where is the item I purchased?)
Step 3: the merchant responds to the buyer’s query and provides the information requested.
Step 4: If the concern is resolved, the case is closed without filing a formal chargeback. If the issue is not resolved, then the buyer can proceed to filing a formal chargeback.
The problem is resolved INSIDE of the chargeback process in an online Resolution Room that encourages both parties to continue to work out the issue themselves. The chargeback process dramatically improves the “upstream” experience.
While there are certainly other aspects of the chargeback process that could use updating, this inclusion of a communication process is a fairly simple change that could go a long way toward providing fast and fair resolutions to consumer problems while avoiding the inefficiencies and frustrations of the formal chargebacks process. Chargebacks will always be available as a last resort, but these changes will help to modernize the chargeback system by leveraging our new communications capabilities, providing early resolution for many transaction issues, and making the overall resolution and redress process for credit card purchases more fair to merchants.