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Tackling Chargebacks in Digital Banking with a Clear Payment History

Michal Maliarov
min read

Chargebacks are an important tool providing clients with the ability to dispute transactions and reclaim funds. These happen when a client contacts their bank to reverse a transaction, often because they believe the transaction was unauthorized, fraudulent, or incorrect. Chargebacks themselves also present significant challenges for merchants, banks, and fintech companies, often resulting in substantial financial losses. And the rise of digital banking has only magnified the importance of efficient chargeback management. With many automation tools available, banks need to understand that prevention is often the cheapest and smartest option available, making clear payment history more important than ever.

Chargebacks in Europe and the USA

Chargeback Rate by Industry and Business Type - Credit Card Processing and  Merchant Account
Chargeback rate by Industry or Business Type (source: Clearly Payments)

The chargeback environment differs notably between Europe and the USA. In the USA, chargebacks are more consumer-friendly, driven by regulations that often favor the cardholder. According to Midigator, the average chargeback rate in the USA is around 0.6 % of all transactions. One of the reasons is the ease of filing disputes in general, encouraging higher chargeback rates.

Did you know? According to Justt research, around 75 % of American and British customers filled a chargeback in 2023.

In contrast,Europe benefits from stronger fraud prevention measures, such as the Strong Customer Authentication (SCA) requirement under PSD2. These measures lead to a lower chargeback rate, averaging 0.3 % across European markets. European banks and merchants also face more strict verification processes, which can slow down dispute resolution.

What is the cost of chargebacks?

The financial implications of chargebacks extend well beyond the transaction amount, impacting operational costs, revenue, and overall profitability. Each chargeback involves a range of direct and indirect expenses, making effective chargeback management crucial for long-term cost reduction.

Direct Costs

Processing Fees: When a chargeback occurs, banks incur processing fees from the card networks. These fees typically range from $20 to $100 per chargeback, depending on the associated risk level. High-risk merchants can face fees as high as $50 or more per chargeback.

Refunded Transaction Amounts: Banks are responsible for refunding the disputed transaction amounts to the cardholders, leading to direct financial losses.

Indirect Costs

Operational Costs: Managing chargebacks involves significant administrative effort. Bank staff must collect documentation, respond to disputes, and engage in representment processes.

Increased Transaction Processing Costs: A high chargeback ratio can result in increased transaction processing fees for the bank. Banks may be flagged as high-risk, leading to higher fees from card networks.

Penalties and Compliance Costs: Consistent high chargeback ratios can result in penalties from card networks. Banks may incur costs associated with compliance and risk management programs like the Visa Dispute Monitoring Program.

Long-term Costs

Reputational Damage: Frequent chargebacks can harm a bank’s reputation, affecting its relationship with both merchants and cardholders.

Increased Fraud Monitoring Expenses: Banks may need to invest in more sophisticated fraud detection and prevention systems to manage high chargeback rates, leading to increased operational expenses.

Did you know? An analysis by Chargebacks911 highlights that the total cost of a chargeback is significantly more than the disputed transaction amount. For example, a $100 chargeback can ultimately cost a merchant up to $240 when all associated costs are considered.

Types of Chargebacks

Fraud-Related Chargebacks: Fraud-related chargebacks happen when transactions are unauthorized, often involving stolen card information. Fraudulent transactions not only lead to direct financial losses but also damage the reputation of the financial institutions involved.

Authorization Issues: Authorization issues result in chargebacks when transactions are not correctly authorized. Common reasons include expired cards, insufficient funds, or technical problems during the transaction process.

Did you know? A study by the Aite Group found that 22 % of chargebacks arise from authorization issues.

Processing Errors: Processing errors include duplicate charges, incorrect transaction amounts, or other mistakes that occur during the transaction process. These errors highlight the importance of accurate transaction processing and reconciliation systems.

Client Disputes: Client disputes, also known as "friendly fraud," happen when customers claim they did not receive the product or service as described. This type of chargeback is particularly challenging because it involves legitimate cardholders disputing valid transactions.

Did you know? According to Cyber source, friendly fraud is now the #1 fraud attack source affecting merchants, accounting for over 50 % of all worldwide chargebacks.

Clear communication and documentation can help reduce friendly fraud. Furthermore, leveraging enriched transaction data from providers like TapiX can help resolve and prevent 40-60% of these conflicts by providing more transparent insights into the transaction history.

What is friendly fraud and how to deal with it

Friendly fraud, occurs when customers dispute legitimate transactions, often with the intent of retaining both the product and there funded money. This type of fraud not only leads to financial losses but also complicates the dispute resolution process, as merchants and banks struggle to provide adequate evidence to refute these claims.

On the contrary, chargeback fraud occurs when a customer intentionally makes a fraudulent claim to their bank, stating that a legitimate transaction was unauthorized or that they did not receive the goods or services purchased. It is a deliberate act of fraud where the customer aims to get their money back while keeping the goods or services, essentially stealing from the merchant.

For banks, both types of fraud are costly. Each chargeback involves processing fees, administrative costs, and potential fines from payment networks. According to Chargeback Gurus, the average chargeback fee can range from $20 to $100 per incident. This may result in a major resource drain, especially if friendly fraud is not properly handled. Its management necessitates a multidimensional strategy that includes detection, prevention, and resolution.

Here are some strategies banks can adopt:

1. Educating Customers: Banks should educate their customers about what constitutes friendly fraud and its implications. Clear communication can help reduce unintentional disputes.

2. Improving Communication Channels: Ensuring that customers have easy access to transaction details and can quickly contact the bank for clarification can prevent disputes from escalating into chargebacks. Enriched data from platforms like TapiX can help with that.

3. Advanced Fraud Detection Systems: Implementing sophisticated fraud detection systems that can flag potential friendly fraud can help banks proactively address issues before they lead to chargebacks.

4. Subscription Management: A significant portion of chargebacks arises from subscriptions that customers forgot about or did not recognize. Banks should offer subscription management tools that allow customers to see, manage, and cancel subscriptions directly from their banking app.

Common Practices in Disputing Chargebacks

Banks often find themselves in the middle of the chargeback process, facilitating the dispute between the merchant and the cardholder. Traditional methods of disputing chargebacks involve collecting and submitting evidence such as transaction records, receipts, and customer communications. According to a report by ACI Worldwide, with considerable resource allocation, the average time to resolve a chargeback dispute is thirty days. In order to resolve these conflicts, banks must dedicate a significant amount of manpower, which might take time away from other crucial banking tasks. There are, however, several steps they can undertake:

Evidence Gathering: Banks must collect documentation such as transaction receipts, shipping confirmations, customer correspondence, and proof of delivery to substantiate the validity of the transaction.

Clear Communication Records: Maintaining thorough records of all communications with the customer can help demonstrate that the service or product was delivered as agreed. This level of detail helps banks build a stronger case when disputing chargebacks.

Chargeback Representment

Representment Process: This involves the bank resubmitting the transaction to the issuer bank with evidence to challenge the chargeback claim. Known as "representment," this process requires banks to compile and submit all necessary documentation in a timely manner.

Compelling Evidence: Banks must provide compelling evidence that the transaction was legitimate and that the chargeback is unwarranted. This includes detailed transaction histories, customer consent records, and any other relevant information that can support the bank's case.

Using Chargeback Management Tools

Automated Systems: Some banks utilize automated chargeback management systems to track, manage, and dispute chargebacks more efficiently. These systems can help streamline the process, reducing the time and effort required to handle each dispute.

Chargeback Alerts: These alerts notify banks of potential chargebacks, allowing them to resolve disputes directly with customers before they escalate to a formal chargeback. This proactive approach can significantly reduce the number of disputes that reach the chargeback stage.

Third-Party Services

Outsourcing: Many banks outsource chargeback management to third-party specialists who handle the process on their behalf, leveraging their expertise and technology.

Clear Payment History is the Solution

The TapiX platform provides a comprehensive view of every financial contact and aids in the highly accurate categorisation of every transaction through enriched transaction data. By utilizing sophisticated data enrichment, this idea modifies the way chargebacks are handled and facilitates the process for banks and merchants to confirm the legitimacy of transactions.

Did you know? According to Clearly Payments, accurate and detailed transaction records can reduce chargeback occurrences by up to 20%.

How Smart Data Help with Transparency and Accountability

Detailed Transaction Data

Comprehensive Records: Clear payment history provides a complete breakdown of each transaction, including merchant name, location, transaction amount, and date. TapiX enhances transaction data with rich and accurate information, such as merchant logos, GPS data points, and categorisation tags. This enrichment makes it easier to understand the nature of each transaction at a glance and quickly identify legitimate transactions or spotting discrepancies.

Enhanced Verification

Quick Dispute Resolution: With enriched data, banks and merchants can resolve disputes more quickly. Clear payment history allows for the immediate verification of transaction details, reducing the time spent on back-and-forth communication. For example, enriched URL address data point can differentiate e-commerce sites like Amazon or eBay from behind the payment gateway, making it easier to understand the transaction and its origin.

Reduced Fraud: Detailed records help in identifying patterns of fraudulent behavior. By comparing transaction histories, it's easier to spot anomalies that indicate fraud.

Increased Trust

Transparency for Consumers: When customers can see a clear, detailed history of their transactions, their trust in the financial institution increases. They are less likely to initiate chargebacks when they have a transparent view of their spending.

Accountability for Merchants: Merchants benefit from clear payment history by having a solid defense against unwarranted chargebacks. Detailed transaction records provide the evidence needed to contest fraudulent claims effectively.

Get in touch with us or use our guide to learn more about user friendly transaction history.

About author

Michal Maliarov

Senior insider

A creative enthusiast who has spent half of his life in the technology industry. Passionate about fintech, AI, and the mobile tech market. Navigating the thin line between the worlds of media and advertising for over 10 years, where he feels most at home.

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