Disputes and chargebacks on the rise
We support dozens of different companies in the space and handle hundreds of thousands of disputes per month. We’ve seen these increases firsthand across a wide swath of customers. In addition to true criminal fraud, there’s no question that the prevalence of friendly fraud also is increasing.
With record-breaking online shopping and other card-not-present transactions, we’re bracing for record numbers of chargebacks. We’ve already started to see some of that, particularly when stimulus checks have hit accounts. But the worst of the volume may be yet to come, with chargebacks expected to hit 615 million this year.
We’re going against some headwinds to be sure. That’s why it’s never been more important to have a scalable, compliant process for managing disputes and chargebacks and be able to adapt to emerging threats.
Looking at trends around the increase of specific dispute types has influenced our approach to case management. In addition to the general theme of more card-not-present transactions being disputed, the three largest categories of disputes we’re seeing are related to account takeover (ATO), ATM withdrawals and P2P transactions.
With account takeover, damage is swift and severe—40% of fraudulent activity associated with account takeovers happens within 24 hours, and losses can be significant for customers and potentially for you. This is one area in which prepaid and debit could have the upper hand on credit in terms of detection because cardholders are typically checking their balances more often.
Of course, the frightening aspect for customers using these products is that it could potentially drain their entire balances. That said, we suspect that some of the alleged ATO activity is first-party fraud, but it’s difficult to prove.
Another ATO vector has been for fraudsters to take over merchant accounts/devices and then using them to fraudulently credit and debit consumer accounts. The fraudsters dispute the transactions as duplicates or incorrect amounts, then withdraw the provisional credit funds nearly instantly. The consumer accounts appear to either be taken over by the fraudsters or, in some instances, the consumer owner may be willingly participating in the fraud.
Despite all the news of cash payments in decline, we’ve seen a marked increase in ATM withdrawal claims for unauthorized transactions as well as ATM non-dispense claims.
One of the reasons we believe non-dispense claims have become so popular is that a cardholder can get the provisional credit and still use their card—unlike when you claim your card has been compromised, and you have to cancel it and wait for a new one.
We’ve seen our clients cardholders out on online message boards offering tips on how to make some quick cash. Their knowledge of the dispute process and associated regulatory requirements is pretty detailed.
Person-to-person (P2P) transfers, which are gaining in popularity with consumers, have also seen a dramatic increase fraud—as much as 700% over the last year, according to some reports.
We’re not seeing quite that dramatic of a shift in any portfolio we support, but we’ve seen increases of as much as 400%.
Mitigating dispute and fraud losses
Now the big question: What can we do about all this?
From where we sit in the process, we collaborate closely with our clients to make recommendations, but it’s ultimately up to the client and their compliance team and/or the issuing bank’s compliance team to sign off on any significant process changes. And while I can’t speak to client specifics here, I can talk about a few general best practices to keep in mind.
1. Reprioritize your queue
Your instinct might be to work the oldest cases first, but that’s not always the best strategy. We found that prioritizing the queue based on the underlying risk of the transaction, the potential for funds recovery or the opportunity to complete an investigation before provisional credit is due—while keeping in mind the regulatory timeframes—can actually pay pretty big dividends.
For example, if you’re seeing the same spike in ATM non-dispense claims I mentioned, you might want to change your process so that your analysts are submitting a chargeback the same day the disputes come in. In many cases, you’ll have a response before you ever need to issue a provisional credit. We also have worked out arrangements with some ATM operators to avoid the chargeback process entirely. We contact them immediately, and they provide us with the evidence needed to resolve the case.
The other thing we’ve done as we’ve increased staff for fraud investigation and dispute handling is to make sure newly trained agents are handling less complex or smaller dollar cases than more experienced staff. You can do a lot in the training process, but someone who’s been handling cases for a few years is still going to be better equipped to deal with more difficult cases.
2. Reexamine your write-off thresholds
Review your dispute and chargeback trends and determine whether your write-off threshold is where it should be. Most programs have some sort of de minimis transaction where anything below that amount you’d write off rather than pay to investigate. However, there are a couple of pitfalls to avoid. We’ve worked with a number of clients on the consulting side who kind of arbitrarily picked a number for their write-off threshold without really understanding how much it costs to investigate a claim.
If you’re paying $15 investigating a claim, you don’t want to go through that process for a $5 claim. But a lot of our clients were writing off $50 claims when it actually costs them $12 or $15 dollars to do an investigation and that’s not a good trade-off either. Your de minimis is a very personalized and risk-based decision, but you might need to change it depending on the volume of claims you’re dealing with as well.
Another pitfall here is if you pick a number that’s too high, it’s likely ripe for abuse. There’s no shortage of discussion in online forums, saying for this issuer or that issuer, you can receive funds if you claim less than X amount.
I also recommend putting in controls to track whether cardholders have a certain number of these below-threshold disputes within a given period of time. If that’s happening, then you might want to apply more scrutiny rather than continuing to write off their disputes.