Chargeback. There’s that dreaded word again. Those two conjoined syllables that strike dread into the hearts of merchants far and wide. But fear not! What if I were to tell you that there are several ways to reduce your number of chargebacks, and that you can dispute them before they even go through the consumer’s issuing bank?
You’d be quite happy, wouldn’t you?
First of all, you must understand the basics of chargeback reduction models to see which one, or which combination, will best fit your business. These models help merchants combat unlawful and fraudulent chargebacks and chargebacks issued by consumers through a misunderstanding (like them not recognizing the transaction on their account).
This article is an overview of the best strategies you, as a merchant, can implement to reduce the number of chargebacks to your account, and some of the companies that can assist you.
So let’s begin.
VMPI: What is it, and how does it work?
VMPI stands for ‘Visa Merchant Purchase Enquiry.’ In short, it helps merchants because it provides them the opportunity to stop Visa chargebacks before they are submitted.
According to chargebacks911, 70 percent of e-commerce transactions go through Visa. Furthermore, according to data from Visa, almost three million chargebacks occur each year that result from a cardholder not recognizing a transaction—an honest mistake. However, these chargebacks are harmful to merchants and especially harmful because they are preventable. But, you have options. With VMPI, there is a greater chance of stopping these chargebacks in their tracks without ever going through the arduous process of a chargeback dispute. VMPI offers considerable and near-instant benefits, but know that they work exclusively with Visa transactions.
Traditionally, merchants have operated under the legacy system. In other words, if a cardholder complained to their card issuer about a transaction, the issuer would turn it into a chargeback with little to no questions asked. From there, the burden fell entirely upon the merchant’s shoulders to dispute the charge. However, as this method was often costly, time-consuming, and merchants were presumed guilty unless proven otherwise, their defense of the transaction often did not help them in the long run. To add insult to injury, the merchant would have to pay all the chargeback fees no matter the outcome.
The difference between how it was before and how it is now while using the VMPI program is that all chargeback inquiries can be answered live. This is made possible through VMPI’s Visa Resolve Online platform, which uses real-time data communication between merchants and issuers. The platform answers the inquiries live by utilizing automatic responses to give additional information to the consumer’s card issuer like shipping confirmation, cancellation number, or the product name. This information, known as a transaction inquiry response, is then used to identify if a complaint is valid or not.
In many cases, VMPI can resolve disputed transactions before an issuer files a chargeback. You even have the option of issuing credit to a cardholder through VMPI if you believe it is the optimal way to resolve a potential dispute. Not only does this stop a chargeback, but it can also keep the consumer happy and improve retention!
You must understand that not all systems are perfect, and VMPI is no different. Some cases will be dealt with quickly, but others may not have enough information supporting the chargeback dispute and could take longer. However, to protect you as a merchant, having something like VMPI is essential to reducing chargebacks and lowering the costly and time-consuming effects resulting from illegitimate chargebacks.
Now you understand what VMPI is. Let’s move on to your next chargeback reduction option.
Ethoca Alerts: What is it, and how does it work?
Ethoca Alerts is a technology company that helps merchants protect themselves from fraud and reduce chargebacks. Mastercard acquired them in 2019.
Ethoca Alerts’ mission statement provides an effective way for banks and merchants to communicate with each other to bring together their intelligence to fight against fraud and illicit chargebacks.
The company lets merchants know of confirmed fraud and disputes in as little as a few minutes, and sometimes up to a few days. This is generally much quicker than it takes for issuers to alert merchants of chargeback requests. They interrupt chargebacks from progressing by telling merchants as soon as possible that a consumer is requesting a chargeback. This halts the dispute process with the issuing bank temporarily, and gives the merchant the chance to resolve it without the bank’s interference. The benefit of this is to lower the fees associated with chargebacks and decrease the merchant’s chargeback ratio.
Allowing the merchant to dispute and stop chargebacks before they happen is a benefit that should not be underestimated. It allows merchants to choose an outcome of disputes, giving them more power. As on the spot refunds can be issued, better customer retention and low chargeback fees are more likely to result. If the transaction is potentially fraudulent or the chargeback claim invalid, then merchants can reject Ethoca’s alert and allow it to move into a chargeback so they can dispute it.
Bear in mind that allowing disputed transactions to go into the chargeback process is usually only worth doing if transactions involve a significant amount of money, as the fees and risks are high.
The four-step process of an Ethoca Alert, as described by them in their brochure, are as follows:
- The issuer notifies Ethoca of any confirmed cardholder fraud or dispute.
- An alert goes to the merchant.
- The merchant stops the fulfillment and issues a refund to the customer to not receive a chargeback.
- The outcome is then communicated to the issuer. All liable losses are then recovered by the card issuer on the first contact with the cardholder.
Ethoca Alert charges merchants a fee per alert, no matter how the merchant responds to the alert. This can be costly, but it is a better option than having merchant accounts closed because of a high chargeback ratio.
So, we have one “alert” company out of the way. What about one other?
Verifi Alerts: What is it, and how does it work?
Verifi works directly with e-commerce companies, and they offer various payment protection and management solutions to these companies. Like Ethoca, they were acquired in 2019. Unlike Ethoca, they were acquired by Visa instead of Mastercard.
Verifi uses a technology called the Cardholder Dispute Resolution Network (CDRN), which, similar to Ethoca, warns merchants early of filed chargeback disputes. Once a consumer requests a chargeback from an issuing bank, merchants will receive an alert from CRDN.
Verifi then pauses the dispute, giving the merchant a chance to resolve the issue without going through the lengthy chargeback process. For the best possible outcome, it is generally recommended to issue the cardholder a refund. However, merchants can still allow disputed transactions to go through the chargeback process if they believe it to be fraudulent and if they wish to combat it using representment. Verifi will charge merchants for the alert fee, and the issuing bank will charge the merchants a chargeback fee. It is essential to only use this option in standout circumstances, including if you can easily prove fraud and if the transaction is of a high monetary value.
Resolving a dispute through a chargeback alert means that the merchant’s chargeback rate will not be impacted; they will receive no chargeback fees. Although Verifi charges merchants for each alert, the alert is worth avoiding the high cost and other repercussions that chargebacks are associated with.
Now we’ve discussed some of the companies you can go through and what they provide. But we still need to discuss chargeback representments, as well as their benefits and risks.
Chargeback Representment: What is it, and how does it work?
Chargeback representment is when a merchant contests a cardholder’s claim for a chargeback, presents the case to the issuing bank, and requests them to reverse the chargeback and refund the disputed funds. It’s called ‘representment’ rather than ‘presentment’ as the merchant presents the issuing bank the charge for a second time.
For merchants, chargeback representment is a fundamental aspect of the chargeback process. The process is complicated and involves the customer communicating with the issuing bank, which communicates with the acquiring bank, which communicates with the merchant.
Once the chargeback notice comes in, the merchant can submit the transaction again, but with supporting evidence of its legitimacy alongside it. Firstly, the evidence goes to the merchant’s acquiring bank, and then this bank sends it over to the issuing bank. The issuing bank decides on whether a chargeback should be given to a cardholder or not. Once the issuing bank makes the decision, they notify the cardholder and the merchant.
The reason why a chargeback was requested in the first place significantly affects what type of evidence should be submitted. Chargebacks come with a “reason code,” which is the cardholder’s justification for the transaction dispute.
But what do you submit alongside a chargeback representment? Here’s a few of the primary supplementary materials:
- A rebuttal letter that puts forth your case against a chargeback dispute. Ensure to include details of why you are combating the chargeback and any evidence you have. However, make sure your rebuttal letter is short and punchy, as ease of reading is paramount.
- A record of the transaction, including the AVS and CVV information that applies to the consumer’s payment credentials.
- A copy of your company’s sales terms and conditions, highlighting the parts that relate directly to the dispute.
- If the customer in the dispute had to check a box saying they would comply with the company’s terms and conditions, submit this.
- Evidence of any transcripts or communication evidence with the customer.
- The customer’s past order history, if applicable.
Once the representment gets to the issuing bank, they will look over all the provided evidence and then decide whether the chargeback is legitimate or not. They tend to issue the payment processor rather than the merchant directly, so communication between the merchant and the payment processor is essential.
Suppose the bank decides the cardholder was legitimate. In that case, the cardholder keeps their provisional credit that the issuer provided for the funds disputed, and the merchant has to pay for the funds, product, and any associated chargeback fees. If the bank decides the merchant was right, then the transacted funds are put back into the merchant’s account, and the cardholder will lose their provisional credit.
Be wary that, even if you win the initial case, this may not be the end of representment because customers and banks can continue to submit chargebacks, dragging a long process out even further. Also, be aware that you will only allow friendly fraud to thrive if you take a lackadaisical attitude towards chargeback disputes. If it is easy for cardholders to get chargebacks, the positive reinforcement will likely lead to repeat fraudulent behavior.
Essentially, to ensure win after win against beatable chargebacks and friendly fraud, make sure you submit the best evidence, craft an excellent rebuttal letter, and, most importantly, understand when it is best to accept a valid chargeback.
Now to answer a couple of essential questions.
1. What are the consumer related risks of representments for merchants?
Going through the representment process means you are telling the customer that their claim is wrong. If you turn out to be incorrect, you’ve certainly damaged customer relations and lost a customer.
Not only will you have to refund the customer for their purchase, but you also have to pay for the funds and any associated chargeback fees. Be wary of the high risk involved.
2. What are the merchant bank risks of representments for merchants?
If you do not fight chargebacks, you tell the bank that the cardholder’s claims are valid. And, if you accept too many chargebacks, you’ll get a negative reputation with issuers, and they are likely to be unfavorable towards you in any future disputes.
On the other hand, if a merchant is too aggressive with issuing representments, this can also be viewed unfavorably by the issuing and merchant banks. Therefore, it is crucial to be mindful of the chargeback reason codes and only dispute those with a reasonable chance of being reversed. A company like L3 can help advise on how to manage the dispute process effectively.
Conclusion
Your options for chargeback reduction are wide-ranging, and deciding on what best route to go down can come down to personal preferences. However, if you need any assistance with your decision-making, feel free to reach out to an L3 Representative to help you with any queries.
