Simplifying Chargebacks Isn’t the Answer—We Need Informed Consumers First

Traditionally, if a cardholder wishes to dispute a transaction, a simple call or email to the bank is all that’s required to initiate the process.

The overall ease of filing a dispute is a leading causes for both accidental and intentional abuse of the chargeback process. Unfortunately, a recent announcement from Citi indicates the industry is moving in a direction with even fewer barriers—and greater instances of friendly fraud.

Simplifying the Chargeback Process for Consumers

Citi recently revealed that cardholders now have the power to dispute transactions within the bank’s mobile app. The app will keep the cardholder informed on the progress of the case and any actions taken by the bank on the cardholder’s behalf.

One of the primary drivers of this change is to make the process more consumer-friendly—as the company explains, Citi wants to empower customers to engage with banking tasks via the channel of their choice. However, granting consumers a greater range of dispute options, without impressing the significance of this newfound functionality, will amplify an already unmanageable problem.

For years, I’ve argued that one of the primary contributors to the rampant friendly fraud is a lack of awareness regarding the implications of illegitimate chargebacks. Unfortunately, the industry has not only been reluctant to make consumer educate a priority, the industry as a whole has actually made it easier for cardholders to act without considering the ramifications of disputed transactions.

Now, the ability to file chargebacks in a matter of seconds may encourage customers to act with even less impunity because they don’t understand the broader ramifications of excessive chargebacks.

Cardholders Don’t Realize the Impact of Chargebacks

The problem is not that customers will deliberately commit friendly fraud because they have the tools to do so. Rather, removing friction from the process may create a disincentive for customers to evaluate if a chargeback is warranted when it is so quick and easy to do. If banks are going to remove friction from the chargeback process, then such a move must go hand-in-hand with greater customer education. Otherwise, merchants will likely see chargebacks start to spiral out of control.

The average cardholder doesn’t understand the details of the chargeback process or how chargebacks negatively impact merchants—and ultimately, consumers themselves. In fact, many cardholders falsely believe that disputing a charge through one’s bank is no different from requesting a refund through the merchant.

A study conducted by eConsumerServices revealed just how extensive accidental friendly fraud is. When polling 1,600 cardholders who had disputed a transaction within the previous 30 days, 49% said they didn’t even know they had initiated a chargeback. In many of these cases, the cardholders claimed they simply asked the bank to cancel a subscription or find out if a particular merchant sold the product in question. The cardholders didn’t say the transaction was unauthorized. Rather, they thought the bank was contacting the merchant on their behalf.

Here’s what consumers need to understand…

Consumers need to recognize that chargebacks cost merchants a great deal of time, money, and effort—each illegitimate chargeback is essentially cyber shoplifting. And, consumers need to understand that these actions have grave consequences, which can be as severe as the merchant going out of business.

While merchants pay the heaviest cost for chargebacks, the problem will also come full-circle to impact consumers. Individual consumers who file excessive chargebacks may be identified by their issuer as a perpetrator of friendly fraud, and the bank may close their account as a result.

The problem also impacts the market at large, as businesses may be forced to raise prices to compensate for the cost of increased chargebacks. Also, if chargebacks become a factor in forcing businesses out of the market, that will reduce the pool of potential competitors, further impacting the range of choices available to shoppers.

Creating an Optimal Payments Environment for All

The assumption should not be that customers are out to steal from merchants, but rater, cardholders simply don’t understand the process. This makes it clear that greater consumer education can significantly improve our current situation, especially as issuers work to reduce friction in the chargeback process.

Consumers will see long-term benefits from relying less on chargebacks to resolve disputes, but the average cardholder is unaware of that fact. Thus, to create a fairer payments ecosystem, we need to focus on educating the public and promoting third-party mediation services, like eConsumerServices, before we can even think about further reducing friction in disputes.

Not only will this result in lower costs and greater business sustainability for merchants, but it will mean faster dispute resolution and a better market for consumers in the long run.

Monica Cardone