The rise in awareness of chargebacks and its impact on banks

In today’s digital age, global interest in chargebacks has increased due to the exponential growth of online commerce. Cardholders are increasingly aware of their rights and are ready to initiate chargebacks in the event of dissatisfaction or suspicion of fraud. As consumers become more aware, banks and finance companies face complex challenges when addressing their rights.

As mentioned, we see a growing trend in the growing popularity of chargebacks. This mechanism allows credit card users to dispute charges on their accounts and obtain refunds for transactions made for goods and services that did not meet their expectations or were not received.

Chargeback Chaos: 2 out of 5 Undisputed by merchants

A report from Mastercard shows that chargeback volumes will reach 337 million by 2026a disconcerting one 42% increase. from 2023. According to data from Rightthree out of four Americans and Brits filed a write-off request last year and beyond three-quarters of chargeback handlers reported seeing as many or more chargebacks than in 2022. Due to the complex nature of the dispute resolution process, nearly 60% At least some traders are leaving two out of five chargebacks are undisputedresulting in lost profits.

Chargebacks and challenges for banks

Not surprisingly, the cost of resolving these transaction disputes is enormous and negatively impacts the payments industry billion in revenue. The burden of these costs, which will grow every year, is shared between banks and merchants. Yet the burden of debt collection is often borne by the banks.

Here because.

Typically, if there is a problem with a purchase, the cardholder first attempts to resolve the issue directly with the merchant. If the merchant does not agree to refund or resolve the issue, the cardholder can then initiate a chargeback request with their bank, which will review and possibly cancel the transaction.

This process is supported by the rules of major credit card networks such as Visa and Mastercard. The customer’s bank will request the funds from the merchant’s bank, not the merchant directly. Therefore, funds can still be recovered even if the merchant has gone out of business.

The financial impact and strategic response

With chargeback requests on the rise, banks now find themselves at a crossroads, tasked with streamlining processes and operational costs while firmly safeguarding consumer rights. On a more positive note, increased consumer awareness also presents a unique opportunity to refine chargeback processes. By improving their systems and abandoning manual procedures, which require a lot of resources and money, banks can improve customer loyalty and strengthen the attractiveness of card payments.

An effective response to these challenges requires a multifaceted approach:

#1 Education and awareness

Banks should invest in training both merchants and consumers on the chargeback process to reduce the number of chargeback requests that come through. For merchants, this would include guidance on personalizing the customer experience, such as 24-hour live service, offering free no-questions-asked return policies, and ensuring accurate descriptions of goods and services. For consumers, educational efforts would focus on when a chargeback is appropriate and the consequences of fraudulent disputes.

#2 Improved fraud detection

Financial institutions must continue to improve their fraud detection capabilities. This includes leveraging artificial intelligence and machine learning to identify patterns indicative of chargeback fraud. Fortunately, there is cutting-edge fintech available that can help financial institutions manage fraud detection more effectively and improve their operational efficiency.

#3 Simplified dispute resolution

Simplifying the dispute resolution process can benefit all parties involved. For consumers, a simpler process reduces frustration and builds trust. For merchants, a more efficient system means faster resolutions and less time spent disputing chargebacks. Currently, most banks have outdated software to manage this process; it is still manual and driven by people. The rapid growth of card payments (and therefore also disputes and rule updates) is fueling demand for a digital compliance solution that can help banks save money and retain customers.

#4 Collaboration with merchants

Banks should work closely with merchants to share data and insights related to chargeback fraud. This collaboration can help identify common vulnerabilities and develop industry-wide strategies to combat fraudulent claims.

#5 Political reforms

Financial institutions may need to reconsider their policies regarding chargebacks. This could result in stricter guidelines for initiating a dispute and strengthened verification processes to confirm the legitimacy of a complaint.

As digital payments grow in popularity globally, consumer-initiated chargebacks will also continue to grow as more people become aware of their financial protection rights. Banks are now urged to be more careful and proactive in managing these increases to protect both their operations and their customers in an e-commerce environment.

Managing chargebacks requires investment in technology and the involvement and collaboration of all parties and stakeholders within the payments ecosystem. By putting in place strong preventative strategies, banks and financial institutions can reduce their vulnerability, improve their services and create a safer space for the digital age. Achieving this goal will not only increase customer satisfaction but also strengthen consumer trust in digital payment platforms.

• Dr Fatemeh Nikayin is co-founder of fintech Rivero. Based in Switzerland, with a strong focus on simplifying payment transactions. Rivero provides SaaS solutions for all players in the payments ecosystem, such as issuing and acquiring banks. With Kajo, Rivero simplifies the process of managing current and future compliance obligations with payment networks, and with Amiko, provides a solution to manage fraud recovery and dispute processes end-to-end digitally.

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