By Melody Lashmar - Issue 4: merchants must bear the responsibility for addressing this fraud as there is no incentive for anyone else in the chain of the transaction to take corrective action.
It is time for the regulators and card associations to return some balance to the networks. If the card associations and regulators can tout setting chargeback ratios and penalties for those merchants and acquirers who exceed those thresholds as successful in combatting fraud, then the same structure should work on the issuing banks. It is my belief that the consumer's banks should also have to stay under a given ratio of chargebacks or unauthorized transactions that they initiate. After all, it is the issuing bank that takes the call from their consumer and processes the complaint that leads to a chargeback.
To support this concept, I analyzed a year's worth of return data for ACH transactions. I have included the graph below. I grouped the return data into 3 groups: NSF, Invalids and Unauthorized. I then calculated the ratio of each banks returns to see the split of the three groups against their own returns. You would hypothesize that the ratios would be similar across the majority of banks. What I found was enlightening. The biggest banks in the nation generated twice as many unauthorized transactions compared to the average of all the banks. One can postulate that those banks are getting their consumers off the phone, as quickly as possible, as happy as possible. There is a cost to customer support and those banks are motivated to keep those costs down. There were two notable exceptions though. The first was the bank that also was the originating bank. This bank had a balanced view of the situation because it would be their merchant they would be penalizing from their consumer as they are both banks in this scenario and thus responsible to the regulators for what they, as a merchant account provider, generate into the network. The other exception was a large credit union where it was apparent that they took the time to know their consumers and caught true fraud as it happened and due to the personal relationship, consumers were less likely to lie to them regarding transactions.
Every solution which I have proposed would be easy to implement, would help address the problem and would not create too much of a burden on any one entity. However, I doubt that any of these items will ever be implemented. The reason is quite simple: there has been no merchant group to date that has banded together to stand up and say, enough is enough. There is no access to information for an individual merchant to really understand how big a problem this is so as a result ecommerce merchants devise ways to be able to operate within the gray area of the rules so that they can mitigate the results of the all-too-unbalanced power of the issuing bank and its consumer. Quite frankly, who can blame them.
L3 Payments is dedicated to providing merchants with the tools and knowledge to successfully operate within the current environment as well as provide a reasonable, experienced voice at industry groups and to the regulators to help maintain some sensibleness in the payments networks. In this continued effort, I welcome your stories, experiences and findings.
