Ai Editorial: Ascertaining legitimacy of chargebacks with precision

First published on 14^th November, 2016

Ai Editorial: What can reduce an airline’s liability when we talk of chargebacks? Various stakeholders need to jointly improve the situation as there can be instances where airlines and merchants at large can be clueless.

There are multiple stakeholders at risk when it comes to chargebacks.  Fraudulently filed chargebacks touch each party in the payment industry.  

But is the functioning of the industry in its entirety falling short and ironically rendering most harm to the very consumers it was invented to protect?

The industry cumulatively needs to combat the issue of chargebacks.

As for airlines, today’s solution must be agile and diverse, coupling an evolving defence with effective representment strategies.  Do remember - chargeback prevention is much easier than chargeback representment. So plan prevention diligently. If a mistake is legitimate, then disputing the same will be futile. Airlines need to focus on a multi-layer fraud management plan. It should feature complimentary tools for all-inclusive protection, rather than counting on just the basic tools. It doesn’t mean that there is a need to use every product available. Neither strategy will effectively minimize risk exposure. For example, any merchant using Address Verification Service along with card security codes or 3D Secure is technically using multiple solutions to prevent fraud. Other options include card security codes, geo-location, device authentication, proxy piercing, biometrics etc.  Airlines need to carefully consider a plan that will address their individual threats.  

Other stakeholders, too, need to improve:

·         Acquiring banks can help reduce the effects of fraud by establishing internal blacklists and developing chargeback triggers for advanced alert notifications.

·         Processors who undergo the most stringent underwriting procedures to maximize their KYC (Know Your Customer) compliance will ultimately reap the benefits through helping to ensure their merchants are following best practice methods that work alongside operational efforts to prevent friendly fraud.

·         For issuers, additional due diligence is key.  Despite the temptation to rapidly resolve a cardholder dispute, additional effort will pay off in the long run for those who consciously work to prevent bad habits from forming in the first place.

Industry issues

It is pointed out that the problem of chargeback fraud has worsened due to operations of banks that offer both issuing and acquiring services.

“There are various entities involved in the chargeback process and each impacts the outcome differently. Some parties help while others hinder. But more often than not, the individual entity isn’t to blame, rather the policies and regulations set forth for the entire industry,” says Chargebacks911’s COO, Monica Eaton-Cardone.  Citing an example, she says, ecommerce wouldn’t exist if card networks and issuers hadn’t taken steps to boost consumer confidence when it comes to payment card use and liability. By abating cardholder’s fears about potential losses tied to fraud, networks and issuers have enabled millions of businesses around the world to experience optimum profitability via card-not-present transactions. However, by advertising zero liability, issuers have inadvertently incentivized friendly fraud. On the other hand, cardholders and merchants are both, technically, customers of the card networks. “As you can imagine, appeasing both sets of customers would be a challenge! Unfortunately, regulations often benefit the cardholder while too much onus is put on the merchant. However, networks have made strides in recent years to slightly lessen the merchants’ liability—for example, accepting flight manifests as compelling evidence and MasterCard’s reason code modernization efforts,” explained Monica.

Being meticulous

Despite the hundreds of reason codes used by card networks to categorize chargeback causes, there are actually only three sources of chargebacks: criminal fraud, merchant error, and friendly fraud.

First, merchants need to reduce their exposure to criminal fraud. With the proper technology, customized rule sets, and expert analysis, merchants can significantly reduce the number of unauthorized transactions that get processed. Next, eliminate merchant error. As much as 40% of chargebacks could be cause by the merchant’s own mistakes, oversights, or shortcomings. Ensuring the business’s actions or inactions haven’t actually caused the transaction dispute is essential. An objective and unbiased review of policies and operations can help create an exemplary customer experience and flawless payment processing.

If merchants can eliminate the first two sources of chargebacks, all that’s left is to manage is friendly fraud.

“Nearly all reason codes can be used to mask friendly fraud; cardholders disguise their unscrupulous behavior by claiming a variety of falsehoods. Because merchants don’t have any other way to determine the real motivation, they are forced to take reason codes at face value,”  says Monica. “Until there is a reason code labeled ‘friendly fraud,’ merchants will forever be engaged in a guessing game—is this claim legitimate or friendly fraud? This uncertainty is what drives merchants’ inaction. Unless merchants couple professional assistance with chargeback management technology specifically designed to identify the true source of the transaction dispute, they’ll only be able to address the obvious cases of cyber shoplifting.”  

Issue of legitimacy

If the case isn’t obviously friendly fraud, merchants are left with the great debate of legitimacy. In these situations, many merchants assume it is better to err on the side of caution, as making an incorrect response could inflict severe consequences. Letting friendly fraudsters slip by is better than mistakenly challenging legitimate criminal activity or an error on the merchant’s part. Moreover, the resources demanded of friendly fraud mitigation is usually more than merchants are willing to sacrifice—especially since in-house teams see such limited ROI. Bottom line: merchants aren’t taking great enough strides towards effective friendly fraud mitigation. However, there are numerous factors outside their control that influence their reluctance to make a more substantial effort.

There are countless examples of how friendly fraud is executed.  As Monica explains, airlines can suffer from the equivalent of ‘return fraud’ that is perpetrated in any other ecommerce industry. For example, a cardholder buys tickets but later realizes she must change her travel plans. Because she doesn’t qualify for a full refund from the airline, she’ll file a friendly fraud chargeback and claim the purchase wasn’t authorized—when in fact, it was. Card networks have announced they’ll accept the flight manifest as compelling evidence against friendly fraud. However, there are a very limited number of situations where this documentation can actually help. For example, a cardholder buys a ticket so his girlfriend can come visit at Christmas. While she’s there, the two get in a big fight. Grieved that he paid so much money for such a lousy trip, the cardholder disputes the original purchase. Because the cardholder’s name doesn’t match the flight manifest—because the boyfriend bought the girlfriend’s ticket—there is little the airline can do.

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