Dispute write offs: Financial losses related to dispute write offs and chargebacks are high. A sample study of a leading global issuing bank showed close to $11 million spent in annual dispute write offs. This did not include the cost of managing the dispute. Financial institutions need to manage not only their operating costs such as labor, technology, overheads, etc., but also bundled costs of managing a dispute which could be $50/dispute or even higher (excluding arbitration) .
Arbitration: Every case filed for arbitration by the issuing bank with PNA members to resolve a chargeback that is challenged by the acquiring bank can cost between $250 and $750. If the issuing bank failsto win the arbitration, they are required to pay the entire cost of the arbitration.
It is estimated that the total cost of managing disputes and chargebacks can be up to 15% of operating costs. Added to this are the costs involved when an issuing banks credits a customer by deciding not to investigate. There are two key reasons for not initiating an investigation –
A) The issuing bank may be keen to maintain customer satisfaction (also called good faith write off ’s) or
B) The disputed amount may be below a pre-determined threshold and could be too small to investigate.
In either case profitability is negatively impacted.
The Impact on Productivity, Costs & Customer Satisfaction
We have already discussed identity fraud as being a growing reason for disputes and chargebacks. Chargeback can be triggered by unauthorized purchases, cyber-shoplifting, errors in billing amounts, goods not being delivered, the quality / model / type of goods delivered not matching the merchant’s promise in the case of online, mobile catalogue or kiosk purchases.
When a transaction is disputed by the card holder, it sets into motion a complex, manual, time consuming, expensive and resource-intensive sequence of events to identify the exact reason – called the “Reason Code” - for a chargeback (Figure 8).
The growing volume of chargebacks, the complexity in documentation requirements, frequent changes in PNA guidelines and meeting Regulation Z (Truth in Lending Act, see highlights on page 8) statutes means that agents assigned to investigate claims rarely have the time or requisite tools to accurately identify the correct reason code.
Errors and the time taken in manual reason code identification are compounded by several factors:
- Fast changing regulations that make it difficult for agents to be familiar with every reason code requirement.
- Conflicts between Regulation Z compliance requirements and PNA guidelines (just the 2010 MasterCard Worldwide Chargeback Guide totals 619 pages).
- Lack of streamlined processes to manage disputes and chargebacks.
- lack of adequate agent training (including attrition) on chargeback management leading to backlog.
- Growth in false positives, or claims that should not be in the disputed category, due to lack of adequate agent training.
- Lack of adequate documentation – sometimes it takes up to four interactions with the customer to resolve a dispute.
- Broken communication with customers.
- Non-customizable communication formats that limit efficacy.
- Use of non-optimal or primitive channels for customer communication Each of the above factors leads to lower productivity, increase in turnaround time (TAT) for settlement of a dispute and directly lowers customer satisfaction levels. This is in addition to the issuing banks still remaining vulnerable to regulatory breaches.
The growing volume of chargebacks, the complexity in documentation requirements, frequent changes in PNA guidelines and meeting Regulation Z statutes means that agents assigned to investigate claims rarely have the time or requisite tools to accurately identify the correct reason code.
Highlights of Regulation Z (Truth in Lending Act)
- Cardholder must notify issuer of a dispute within 60 days.
- Acknowledgment letter must be sent within 30 days.
- Dispute must be resolved within two complete billing cycles.
- Disputed transaction cannot be placed back on the account after two complete billing cycles.
- Final resolution letter must be sent.
- Finance charges and fees must not be assessed against disputed transaction.
- Upon resolution the card issuer may be responsible to follow additional requirements.
In a bid to address these issues affecting recovery and customer retention, issuers routinely follow quality checks by auditing between 10 to 15 % of all disputes and chargeback resolutions. This of course, does not provide a guarantee that the other 85% to 90% of resolutions are accurate or do not violate regulations.
This raises several questions:
- what kind of support system can assist agents in identifying the exact reason code by analyzing the transaction?
- How can automation improve the possibility of successfully recovering the amount for the customer so that customer retention for the issuing bank is made simpler?
- How can there be a 100% check on resolutions to bring down financial penalties due to regulatory breaches?
- Can the disputes & chargeback process provide a positive impact on productivity, cost and more importantly on customer experience?
Strategic Levers to Strengthen Disputes & Chargeback Management
Issuing banks can take certain steps to alleviate issues in their disputes and chargeback process. While outsourcing such a process will bring immediate labor arbitrage benefits, we opine that for a long term solution issuing banks should re-look at the legacy systems currently in place and the possibility of replacing these with either a home grown system or partnering with vendors who offer an adaptive, secure and reliable chargeback management platform involving minimal human intervention. Vendors with the ability to do both (provide the platform and service) can offer a long term remedy that adds immense value in not just lowering costs but also improving customer satisfaction.
Issuing banks will be benefitted by ensuring they look at platforms that provide four key functionalities as specified below.
1) Identification of the correct reason code
Most often than not agents handling the disputes process rely on manual assessment of dispute reason codes and require extensive training (then retraining) which adds to operational costs and is prone to subjective interpretation of a dispute which may lead to human error in the identification of the right reason code. Therefore automating the identification of the chargeback reason code (by examining transaction details) using the right domain expertise can help address this issue. An agent can be then made familiar with the time-scales and documentation involved with the identified reason code, without having to refer to the voluminous Scheme Regulation Manual (SRM) that provides the documentation list. This will eventually reduce manual intervention, improve turnaround time and enhance the accuracy of resolutions.
It is vital that issuing banks urgently examine quick to deploy scalable solutions that use reliable technology without increasing the cost of managing the growing number of disputes.
2) Improve communication with customer
Once the agent generates the list documents required based on the SRM the customer needs to be adequately informed (in line with Regulation Z). Unfortunately, most of today’s customer communication modules as part of the disputes and chargeback management systems seem inept to meet this need. Customer communication letters are pre-set, designed only to let agents tick a check list of required documents. This does not always adequately communicate what the customer needs to be told. Such communication leaves the customer confused and unable to respond accurately in time. Additionally this adds to the turnaround time and leads to customer dis-satisfaction. Ideally, the Disputes & Chargebacks Management solutions should have an integrated Document Management System (DMS). Such a system coupled with a guided workflow would indicate which documents are required from the customer for a particular reason code and should direct the agent in managing the dispute in a timely manner while keeping the customer communication current. This helps increase customer communications accuracy. The DMS should also be flexible allowing for customization of letters, e-mail, secured messaging, etc., and should have the ability to highlight only the missing information which the customer needs to provide. Once the information is received the system should auto tag and inform the agent about completeness of the documentation to expedite the dispute resolution process. This will go a long way in streamlining the customer communication process and in turn increasing customer loyalty and satisfaction.
3) Ensure regulatory and PNA requirements are met
Issuing banks operate in an ever changing regulatory environment. This also applies to regulations that cover retail customer management, payment processing, disputes management, etc. We have already highlighted the importance of Regulation Z in this article and find that in the current scenario many issuing banks that continue to operate on legacy systems spread across several tools and applications where quick adaptability to changes in regulations may be time consuming, costly and complex. Hence a solution which could for example dynamically codify all regulatory and PNA requirements and make them available in real-time for an agent so that the case management work flow allows business as usual will help reduce potential legal/ regulatory lapses thereby reducing legal costs and financial penalties.
4) Use intelligent analytics to reduce operational costs
Each dispute leaves a trail of data and most financial institutions struggle to mine this data effectively. We believe that with automation and analytics issuing banks can reduce the likelihood of human error and improve process efficiencies. Intelligent systems with inbuilt tools like predictive analytics can help understand the origin of disputes and interpret loss patterns to guide issuing banks to make intelligent rules in their card authorization processes which in turn reduces incidents thereby bringing down operating costs as well as reduces potential disputes / write offs.
The Path to Success for Disputes and Chargeback Leaders
To summarize, the manual process to manage chargebacks is prone to errors and can take between 45 - 120 days to resolve. For a disputes and chargeback leader, the key to success is to ensure that disputes are closed quickly and accurately. This implies automating the process, using guided documentation processes and workflows, eliminating agent errors, introducing a high degree of intelligence and analytics into the chargeback management framework.
This strategy has several salient features. The time, cost and resources involved in training an agent in chargeback processes is greatly reduced. Lowered agent attrition is therefore not the number one priority of the leader. By deploying automation, intelligent analytics, etc., new recruits can be quickly made operational. Importantly, additional capacity due to the projected increase in disputes volumes could be better augmented and predictive analytics deployed to counter any emanating trends or financial threats.
With the growth in E-commerce and M-commerce there is going to be an increase in the number of cards not available physically. In addition, economic conditions are expected to contribute to an increase in fraudulent transactions. As a result, the number of disputes will continue to grow. It is therefore vital that issuing banks urgently examine quick to deploy scalable solutions that use reliable technology without increasing the cost of managing the growing number of disputes.