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Community Voices: Payment disputes putting Tampa Bay businesses in danger

Monica Eaton-Cardone

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Payment disputes – commonly knowns as chargebacks – are nothing new for those operating in the eCommerce space. Chargebacks sap revenue from businesses in the form of lost sales and merchandise, added fees, and other threats to one’s bottom line. This problem is taking on a whole new dimension in the age of COVID-19, though.

We already observed a 23% increase in overall chargeback issuances within weeks of the quarantine. It’s difficult to get granular data on dispute rates here in the Tampa Bay area since the COVID-19 outbreak, though, as the situation is still developing on a day-by-day basis. Much of the data regarding specific regions is opaque and only be parsed with any reliable degree of accuracy after the fact. Plus, determining how the COVID-19 crisis impacts each business individually will vary based on a variety of factors, like one’s business model and product vertical.

All that said, there’s undeniably a direct, causal relationship between the COVID-19 crisis and chargeback filings. The virus forced most businesses to operate at a reduced capacity, if not close their doors entirely. This translates to cancellations, logistical challenges like supply chain interruptions, delivery delays and overloaded customer service teams.

Travel and entertainment have been hard-hit by the shutdowns, and these businesses represent a significant chunk of our regional economy. Many restaurants have turned to digital channels like online ordering to stay afloat, which involve a significantly higher inherent risk of disputes.

No matter how you slice it, Tampa Bay businesses are likely to see chargebacks continue to rise as the crisis drags on.

Fraud & Chargeback Abuse on the Rise

Fraudsters are looking for any opportunity to take advantage of the situation. The Department of Justice issued guidelines to defend against fraud, but it’s unavoidable that some consumers will still fall victim.

Florida is currently ranked number one in the nation when it comes to reported cases of fraud. In 2018, 1.4 million Floridians lost more than $84 million to fraudulent activity. And, when cardholders fall victim to fraud, businesses can expect chargebacks as a result.

As if the heightened chargeback risk weren’t bad on its own, we must also consider the fact that many of the chargebacks filed against merchants are fraudulent. In fact, we project that nearly two-thirds of all chargebacks filed by 2023 will be cases of so-called “friendly fraud,” meaning chargebacks filed without a valid reason.

More consumers will file chargebacks to recoup their funds as they learn to (falsely) view the chargeback process as a quick, easy alternative to a return. The average consumer doesn’t see a
problem with this because, from their vantage point, there’s no real difference between a return and a chargeback. So, while customers are technically supposed to contact a merchant before requesting a dispute, only about 14% do so.

All totaled, we see the number of friendly fraud issuances grow by about 20% annually. That was before COVID-19; now, it’s reasonable to assume that chargeback issuances against local businesses are going to remain elevated above the preexisting trend line. In effect, this is the “new normal” for business.

Existing Process Unresponsive to Change

Part of the problem is that the current industry approach to chargeback management is antiquated. The chargeback process dates to the mid-70s, and not much has changed since then, despite massive and disruptive change in the larger market.

This will require a comprehensive solution involving consumer education, new technologies, and updated payments industry infrastructure. Visa and Mastercard have made some progress with their
Visa Claims Resolution and Mastercard Dispute Resolution processes. However, these aren’t enough to solve the underlying issue.

In the meantime, financial institutions that serve merchants could offset this problem by embracing a cloud-based, AI-enabled system. This would help create a more level playing field and provide a substantial value-add to the institution’s clients.

The technology would need to be agnostic and responsive, of course, enabling a fast response to changes in consumer preferences or behaviors. We’ve already observed a significant shift in that regard since resulting from the COVID-19 outbreak, for example. Channels like click-and-collect, plus alternate payment methods like Apple Pay are seeing unprecedented adoption.

AI Solutions Offer Benefits for Merchants & Banks Alike

A single integration backed by AI technology would make it possible to automate disputes effectively for the first time. With the benefit of greater data insight, it would be possible to identify friendly fraud attempts, while eliminating potential chargeback triggers before a dispute is filed. Merchants would see faster resolutions and better long-term results, reducing their costs and enabling long-term growth and sustainability, even under challenging conditions (like we’re now experiencing).

This would have benefits for financial institutions, too. Automating key components of the chargeback response would allow acquirers to dramatically reallocate staff. The result: streamlined processes, improved efficiency, and greater scalability for financial institutions and their merchant clients.

Businesses in the Tampa Bay area will feel the lasting effects of the COVID-19 crisis, even once the worst of it passes. The best solution to this problem is embracing a technological solution to bring the chargeback process into the 21st century.

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