It’s Easier Than Ever to Dispute a Credit Card Charge, and Retailers Hate It
Since joining Citizens Financial Group in March, one little robot has been keeping busy.
CPA1 is a software robot that automates claims processing for credit and debit card chargebacks, in which a transaction is reversed after a customer disputes a charge. In its first three months on the job, CPA1 processed $3.5 million worth of disputes for Citizens, cutting the time the bank spent recovering funds from merchants to fewer than two minutes from about eight minutes. “Citizens was struggling to keep up with the amount of chargebacks,” says Mary Ellen Baker, head of business services for the bank.
The ability to dispute a charge is one of the big reasons consumers trust electronic payments, so banks take their ability to fulfill the requests seriously. But technology, along with a change in rules by payment networks such as those run by Visa Inc. and Mastercard Inc., is making that system a bigger headache for merchants, who are often left to eat the cost. Besides automating claims, banks have updated their mobile apps so users can dispute a charge simply by tapping a few buttons.
Chargebacks can happen when customers claim they didn’t get what they paid for—for example, a food delivery order didn’t arrive—or that a product was defective. Merchants are often liable for these. A chargeback can also happen when a cardholder spots a fraudulent transaction. Historically, card issuers bore the costs for fraud when the payment was made in a store. But after the U.S. began its transition to chip-card technology, which makes it harder to counterfeit physical cards, networks shifted some of the liability onto retailers that hadn’t upgraded their in-store equipment to accept the new plastic. Fraudsters also began targeting merchants who take orders over the phone or online, who are usually responsible for the cost when frauds occur and don’t benefit from the added security of chip cards. The result: a spike in U.S. chargebacks.
U.S. banks are on track to process $5.6 billion worth of chargebacks this year, a 17 percent increase from two years ago, according to data compiled by Aite Group. They’ll reverse 250.7 million transactions. Chargebacks should fall to $5.1 billion in 2020, as more brick-and-mortar merchants upgrade their point-of-sale technology. Card networks have said they’re trying to ease the burden in the meantime, by requiring banks to cover some chargebacks for small amounts.
Still, almost 60 percent of banks are pursuing automation to expedite the process, which used to be done almost entirely by hand, according to Chargebacks911, a risk mitigation firm that helps merchants handle such transactions. One reason card issuers want to speed things up: Aite found that banks spend about 2 cents per second on the phone with customers reporting chargebacks. It typically takes 13 minutes, or more than $15, per call. That will probably add up to $2 billion this year.
Monica Eaton-Cardone, chief operating officer of Chargebacks911, says automated systems often don’t keep up with the ever-changing rules regarding chargebacks and can miss issues in a chargeback request that a human might be able to see. “Robotics is certainly a move in the right direction, but it’s not yet a comprehensive replacement for human intelligence,” she says. In its research, Aite Group found that card issuers often give customers varying degrees of leeway when it comes to accepting evidence for granting a chargeback. Retailers complained to the firm that this lack of consistency led to mixed results from issuer to issuer.
Banks aren’t the only ones making chargebacks harder on merchants—there’s probably some gamesmanship by consumers who know that issuers will tend to give them the benefit of the doubt when they say there was a problem with something they bought. “Consumers are more aware of chargeback rights than ever,” Julie Conroy, a research director at Aite, wrote in the company’s report. There are online forums where users discuss strategies for disputing charges and how many chargebacks certain banks will allow a customer per year.
At Domino’s Pizza Inc., transaction-related costs climbed to 3.5 percent of total revenue in the first quarter, up from 2.1 percent a year earlier. Chief Financial Officer Jeffrey Lawrence attributed the move to climbing chargeback costs, an area he said the company had dedicated resources to addressing. A few Domino’s customers might have different ideas, though. “How to get free pizza: 1. order, 2. get it, 3. chargeback,” wrote someone called Sweatshirttttt on Twitter. “Ez pizza.”