For consumers, process takes less time; for merchants, it cuts fraud and costs
Personal Finance Writer
Writes trendy stories about credit cards.
Chargebacks are time-consuming headaches for credit card holders, merchants, banks and credit card processors. The Visa credit card network hopes to ease some of that pain.
Visa says a typical chargeback – which occurs when a cardholder disputes a charge and receives a refund from the card issuer – takes 46 days to resolve. If the case is complicated, the chargeback process can last 100 days or more.
Under a new system Visa is rolling out April 13, it typically should take 31 days or less to close a chargeback case.
The new setup, known as Visa Claims Resolution (VCR), will “fundamentally change” how disputes over credit and debit card transactions are handled, says Grant Horvath, senior analyst at Chargebacks911, a provider of chargeback management and prevention services.
“Traditionally, if a customer wanted to challenge a transaction, the bank would file a chargeback on the customer’s behalf,” Horvath says. “That would initiate a long, complicated process called a ‘litigation-based dispute,’ involving a lot of back-and-forth between the customer, the banks and the merchant.”
Horvath says the new Visa chargeback program – which already has been tested overseas – automates the chargeback process for both online and offline transactions. (In the new Visa lingo, chargebacks will be called disputes.)
“Once the customer’s bank submits a dispute through the system, it can be judged and resolved in a matter of minutes in most cases, rather than weeks,” he says.
On its blog, Payscout, a provider of payment technology, explains that with its new chargeback system, Visa is shifting from the litigation model to a “liability assignment” model.
So, rather than each chargeback case being treated like “courtroom trial,” Payscout says, Visa will automate much of process and assign liability to one side or another. “Human intervention” will come into play only in complicated cases, the company says.
“Once the customer’s bank submits a dispute through the system, it can be judged and resolved in a matter of minutes … rather than weeks.”
Benefits for consumers and merchants
While consumers will benefit from the new Visa system, Scott Stone, chief marketing officer at Chargeback, a provider of chargeback management and prevention services, notes that the Visa switch will have a much bigger impact on merchants.
Consumers, though, will gain many more details about disputed transactions, he says.
Several things can prompt a chargeback. For instance, a consumer might suspect a fraudulent purchase was made or might be dissatisfied with merchandise that was ordered. Regardless of the reason, chargebacks customarily have been bogged down by increasingly outdated procedures.
While the real-time Visa claims resolution system will benefit millions of consumers, it also will radically alter how millions of Visa merchants handle chargebacks.
Horvath says a key difference for merchants will be the “reason codes” associated with chargebacks. Under its old system, Visa assigned 22 reason codes to these disputes. In the new system, only four reason codes will be used: fraud, authorization errors, processing errors and customer dispute.
Furthermore, merchants will be allowed to challenge disputes only if they have “clear and absolute proof,” Horvath says.
On his company’s blog, Stone explains that the new setup also will eliminate invalid chargebacks. For instance, if a consumer initiates a chargeback, but the time limit has passed or the criteria aren’t met, Visa will stop the dispute from being elevated to chargeback status. Visa expects the new system to trigger a 14 percent drop in invalid chargebacks.
Moreover, experts say the new system should help prevent chargeback fraud, thanks to automatic decisions being made in real time. Chargeback fraud happens in a number of scenarios.
For instance, a customer falsely claims a product or service wasn’t provided or ordered, then files a chargeback request with the card issuer (bypassing the merchant) to get the product or service for free.
Consumer abuse of the chargeback process also will be curtailed by the new dispute resolution system. The number of chargebacks allowed from a given account will be restricted to 35 within a 120-day period, according to 360 Payment Solutions, a provider of card-processing technology.
Chargebacks cost merchants billions every year
For merchants, perhaps the most significant advantage of Visa Claims Resolution will be a decrease in chargeback fees they pay, according to Stone. For each chargeback filed against a merchant, the merchant’s bank imposes an administrative fee ranging from roughly $20 to $50.
If the merchant racks up a slew of chargeback fees, that could cause a big financial hit. And a bank can shut down a merchant’s account if it accumulates too many chargebacks, Stone says.
Also, 360 Payment Solutions points out that under the new Visa system, a merchant now will get a bit of advance notice that money for a chargeback will be pulled from the merchant’s bank account.
Overall, Visa’s chargeback resolution system represents a “mixed bag” for consumers and merchants, Horvath says.
“On one hand, faster dispute processes mean quicker resolutions for cardholders and fewer resources tied up in limbo for merchants,” Horvath says. “Also, invalid disputes will – at least in theory – be filtered out before processing, which will save merchants the trouble of digging through a mountain of cases.”
“However,” he adds, “the standards to challenge a dispute if the merchant believes it’s invalid will be much tighter.”
“Invalid disputes will – at least in theory – be filtered out before processing.”
The breadth and effect of chargebacks are enormous, according to Stone.
Data from the Federal Reserve Bank of Kansas City and The Nilson Report, a publisher of data about the credit card industry, indicates roughly 100 million chargebacks were filed in 2017, Stone says. That works out to about 250,000 disputes a day.
In 2017, merchants around the world lost an estimated $28 billion to chargebacks. In tandem with the rise of e-commerce, that amount is expected to rise to $35 billion by 2020, he says.
Considering that Visa is the No. 1 credit card processor, Horvath thinks it’s only a matter of time before other industry players – namely Mastercard, American Express and Discover – follow Visa’s lead. He views the new Visa chargeback system “as a positive move in that direction.”
“It’s a great idea. It’s something that Mastercard, American Express and Discover will implement in short order,” Stone says.
See related: Chargebacks and how to dispute a credit card purchase, Banks make chargebacks easier, 8 tips for merchants to avoid credit card chargebacks
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