Consumers often view the chargeback process as an easy alternative to making a return. Instead of following the proper channels and asking for a refund, though, they bypass the merchant and go directly to the bank to dispute the charge.

This practice, otherwise known as friendly fraud, is a threat that grows by roughly 20% each year. If cardholders continue to abuse the system, their actions will have serious consequences for both merchants and financial institutions.

Some merchants and FIs are adopting new strategies and technologies in an attempt to fight back against this persistent and growing problem.

The Negative Impact of Chargebacks on Financial Institutions

Cardholders are required to contact the merchant prior to filing a chargeback. However, many cardholders skip this step. It shouldn’t come as a surprise that only 14% of cardholders make attempts to resolve issues with the merchant first.

We can trace this behavior back to a few different reasons core problems in the payments space:

• Consumers don’t see the broader consequences of their actions.
• Rapid evolution of payments technology is causing the regulations and infrastructure surrounding the transactions process to fall behind.
• Inconsistencies in practices and policies create opportunities for bad actors to engage in fraud.
• Buyers really don’t see any incentive to alter their behavior.

Merchants suffer the brunt of chargeback damages. However, FIs lose billions of dollars every year due to processing costs, card network fees, and margin compression. There’s also the threat to long-term profitability as the institution’s pool of potential customers shrinks.

If a merchant doesn’t have enough money to cover a sudden surge in disputes, for example, the acquirer will be forced to pick up the bill. The true cost of chargebacks for FIs could be several times what we see from the outside. And, what’s more, chargebacks show no signs of slowing down.

Banks might be forced to tighten their margins. This will, in turn, stifle innovation in the payments and finance space, reduce efficiency, cause costs to rise, and lead to a loss of competitive edge.

Could AI be the Answer?

Despite the problems outlined above, not much is being done to confront the issue of chargebacks from an institutional standpoint. To truly combat the rising threat of chargebacks, we need a comprehensive solution.

Artificial intelligence could provide an advanced and adaptive solution for acquiring banks to address these issues and account for the majority of their losses. AI would give banks the ability to examine expenses like processing costs and network fees in greater detail. They could then deploy solution to target pain points and reduce waste and loss.

The dispute process is often a drawn out, protracted affair. It tends to involve a lot of redundant, back-and-forth exchanges between multiple parties. Implementing AI could speed up the process by introducing automation, which would allow financial institutions to free up resources and reallocate staff.

An AI-based strategy could also streamline the integration process, which would make for a more efficient and scalable solution. It would provide greater data insight to fill the gap between acquirers and merchants, which is not possible under the current infrastructure. The end result would be straightforward chargeback remediation and simple integration.

In summary, acquirers would have the ability to:

• Automate Disputes
• Reduce Costs
• Offer Added Value to Customers

All while simplifying processes and ensuring a more equitable, sustainable payments ecosystem.

Changes in the Payment Industry Require New Solutions

New technology needs to be built in response to changes in the industry, such as breakthroughs in payment methods. Click-and-collect and mobile wallets, for example, have surged in popularity due to the Covid-19 pandemic. While many cardholders will revert to pre-pandemic shopping patterns, many others will continue to take advantage of the convenience offered by these new payment models even after the pandemic ends.

It’s important that financial institutions work closely with merchants and card networks to create a permanent fix to the inconsistencies that enable chargeback abuse. AI won’t completely solve every problem; for instance, we need more emphasis on consumer education regarding the true cost of chargebacks. However, automating disputes on the acquirer’s end is a step in the right direction.

The payments environment is changing. FIs must implement new technologies to meet the demands of the modern payments industry. This is easier said than done, but FIs don’t have to go it alone. Acquirers and processors can employ outside help from the experts at Fi911.

Dispute Lab™ is an industry-defining tool that allows FIs to automate key components of chargeback management. It removes redundancies and makes resolving disputes more efficient than ever.

No more tedious manual processes for dispute management. Dispute Lab allows FIs to receive, interpret, distribute, and process every cycle of a dispute—from retrievals to representments and arbitration cases—using queue-based routing and hundreds of customizable rules. Managing chargebacks is now as simple as pushing a button.

Want to learn how Dispute Lab can help you optimize your chargeback process? Click below and learn more today.