Over the last decade, chargebacks have become a source of contention for eCommerce sellers and banks. The very nature of the card-not-present space makes it challenging to verify the identity of customers, creating a natural separation between buyer and seller.
The situation gets even trickier when financial institutions join the mix. The desire to provide a frictionless service for cardholders can lead to a skewed understanding of the chargeback process. Consumers eventually begin to see chargebacks as the path of least resistance. Unfortunately, this attitude can lead to billions of dollars in additional liabilities both merchants and financial institutions every year.
The role of mitigating chargebacks often falls on merchants. As chargeback losses continue to climb, though, financial institutions must also join the fight. Could AI-enabled chargeback management be the solution?
Chargeback Losses Are Growing
For financial institutions, the most common source of loss associated with chargebacks are liabilities, added overhead and write-offs. There are also indirect costs to consider, like return fraud, declined transactions from insufficient fraud data, and margin compression that occurs over time.
We can illustrate this more clearly using a concrete example. In 2017, businesses lost around $31 billion in direct chargeback costs. Financial institutions absorbed roughly $12 billion of that total. When we account for those indirect losses as well, the overall cost of chargebacks could be several times higher.
Unfortunately, card disputes are often filed without a valid reason; a process is known as “friendly fraud.” These friendly fraud chargebacks are expected to increase at a rate of roughly 20% each year. Data from Chargebacks911 indicates that friendly fraud will represent nearly two-thirds of all disputes by 2023.
What should we take away from these startling figures? If nothing else, they illustrate that something must be done to curtail this problem.
AI Could Be the Answer
The payments industry is not advancing at the same rate as technology. Many of the current processes used are built on legacy infrastructure and rooted in the pre-internet age. Tools like Visa Claims Resolution and Mastercard Dispute Resolution were created to address these inconsistencies. They are a step in the right direction, but they don’t fully address the root of the chargeback problem.
Financial institutions are now turning to new technologies to mitigate the risks of chargebacks, both for themselves and for merchants. At its core, the chargeback process needs human oversight. That said, artificial intelligence could be the key to streamlining certain elements of the process to provide increased efficiency while decreasing costs.
Incorporating a cloud-based AI approach could eliminate redundancies in the chargeback process by cutting out back-and-forth decisioning and reconciliation processes. Legitimate disputes would be resolved in hours instead of weeks, and friendly fraud chargebacks would slowly disappear.
Many financial institutions lack the ability to distinguish between legitimate and illegitimate dispute claims. An AI tool capable of instantly recalling and sending transaction data would provide the opportunity for a more accurate analysis of industry trends and consumer preferences. This translates to significant saving for banks on overhead costs, chargeback processing, and write-offs.
With less manpower required to address these issues, financial institutions could reallocate staff currently occupied with chargeback-related activities. This would allow for greater efficiency in other departments. Introducing AI into the dispute process would also put eCommerce merchants and banks on the same playing field. This would allow them to work as partners in the transaction process, rather than as opposing parties.
Finding a Permanent Solution
AI can facilitate faster communication between institutions, merchants, and card networks. This means more revenue retention and less margin compression tied to disputes. So, as the digital market continues to evolve, AI solutions will be the key to achieving a more balanced payments ecosystem. The result of embracing this new technology will be a dynamic, cost-effective market, with benefits for businesses and consumers alike.
It’s important to note that even an AI-enabled response won’t be without missteps. As with any new process, be prepared to work out the kinks to ensure a permanent fix that is comprehensive, yet also industry-specific.
AI-enabled chargeback remediation is one piece of a much bigger solution. To ensure its success, both merchants and financial institutions need to be prepared to evolve and tackle the problem head on.
Want to learn more about how AI-enabled chargeback protection can help FIs save money and deliver greater value to customers? Click below and speak with one of our chargeback management experts today.
