Costs Fall on Merchants, Banks and Consumers
Econintersect: Fraud involving credit, debit and prepaid cards constitutes a big and growing problem for merchants, banks and consumers. Direct costs totaled nearly $14 billion globally in 2013. Sources of fraud include stolen and illegally used cards and stolen credit records. But a feature which most consumers perceive to be a safety feature, chargeback for cancelled transactions, is becoming a additional loss factor for cards. Chargeback fraudsters can submit chargeback claims for transactions that have not been reversed, intending to keep the merchandise and not pay for it.
The Overall Fraud Situation
Before looking more closely at the chargeback process, let's review the entire fraud story. Fraud is a global story but it is becoming more dominated by the U.S. In 2013 the U.S. experienced more than half of all global payment card fraud, after being in the low to mid 40% range the previous four years.
A different presentation of the data (below) shows more clearly how payment card fraud appears to be accelerating in the U.S. Payment card fraud has doubled worldwide over the past four years. The U.S. was growing payment card fraud slightly faster than the rest of the world but exploded to a higher level in 2013.
The $14 billion payment card loss total in 2013 is actually the tip of the iceberg, according to LexisNexis. They report that the cost of identity theft to consumers in 2012 was $21 billion, almost double the cost of payment card fraud alone. And for merchants, indirect cost is even higher. From a 2013 report:
... merchants are incurring a $279 loss for every $100 of fraud losses. The increase is attributed in part to the growth in fraud activity through online channels, already the most expensive channel due to costs associated with fees and interest owed to financial institutions, charge-backs and other replacement costs.
Chargebacks and Chargeback Problems
The rise of chargeback fraud is negatively affecting credit card issuers and increasing the costs of the services provided by the issuers to consumers. They are negatively affecting merchants who have to pay the card issuer special fees when chargebacks are presented, whether the chargeback is legitimate of fraudulent. Of course they additionally bite the merchant when they get stuck with fraudulent chargebacks that "stick". And they negatively affect consumers in several ways:
- Consumers can experience "hassles" when trying to claim a legitimate chargeback;
- A consumer may fail, in some circumstances, to successfully complete a legitimate chargeback, ending up paying for a product or service they did not receive;
- The contesting of a chargeback by a merchant runs a possible credit score risk for the consumer;
- The contentiousness of some chargeback processing raises costs for all involved and banks may try to recover some of those by raising fees.
According to eConsumer Services co-founder Gary Cardone:
"Consumers are failing to realize that chargebacks are no longer an 'ace-in-hole' and come with steep consequences. Nearly one-third of merchants contest all chargeback claims filed, and 40 percent of those cases are won by merchants (2), resulting in an increased number of unhappy customers contacting their banks for answers-which, in turn, become cost centers for issuers."
These added costs are then passed down to consumers through increased prices and fees for products, credit and services.
The average time it takes to process a credit card dispute is about 15 minutes, in comparison to the fraction of time it takes to complete the majority of other cardholder services. Chargeback processing is a lengthy manual process because the claim must first be validated - and taking shortcuts on this process can lead to customer dissatisfaction, may result in the cardholder losing the right to the temporary refund they initially receive...and eventually, predicts Cardone, could even affect their credit score should they be found fraudulent.
Click on the following image to access an infographic about chargebacks:
This article was sponsored by eConsumerServices, a provider of chargeback mediation services for consumers. eConsumerServices acts as a safe and effective communication avenue between the consumer and the merchant. eConsumerServices utilizes a vast network of contacts that includes both online merchants and credit companies and acts as an online mediator to forge a quick resolution between the consumers, banks and merchants.
- Skimming off the Top. (The Economist Newspaper, 15 February 2014 - economist.com, 13 March 2014.
- Credit Card Chargeback Process Guide for Visa, Mastercard and AMEX (BrandonGaille.com, 20 July 2013)
- LexisNexis® True Cost of Fraud(SM) Study Says Merchants Are Incurring a $279 Loss For Every $100 of Fraud Losses (Press release, LexisNexis, 09 September 2013)