What Are Customer Payment Disputes? Are They Ever a Good Idea?
Customer disputes offer important consumer protections for making credit and debit card transactions. Having said that, they were designed to be used as a last resort, when all other options failed. They are seldom actually necessary, and should never be the initial response to a complaint.
Let’s examine what a customer dispute entails, when it’s appropriate, and what merchants can do to prevent them.
What is a Customer Dispute?
A customer payment dispute, more commonly called a chargeback, happens when a cardholder disputes (challenges) a payment card transaction and asks the card-issuing bank to reverse it. There are multiple situations where this can occur, but few reasons it actually should. We’ll talk about that a little later in this post.
As a cardholder protection, the inherent right to dispute payments is a good thing. It’s a guarantee that consumers can retrieve money lost to fraudsters, identity thieves, and other unauthorized users. Plus, the threat of chargebacks incentivizes merchants to stick to fair practices.
Merchants can pay a heavy price, however, when chargebacks are used incorrectly or carelessly. Not only does the business lose a sale, they also lose shipping costs, merchandise costs, and more. Even if the seller manages to get a chargeback overturned, they’re still liable for bank fees. Plus, neither party can access any disputed funds until the issue is resolved, which could take weeks or even months.
Customer disputes happen. But they don’t have to.
Many customer disputes can be prevented with simple steps. Click to learn more.
For the cardholder, getting the customer dispute process started can be as simple as calling the bank and complaining about a billing charge. The actual process itself, however, involves multiple steps:
STEP #1:The cardholder contacts the issuing bank to challenge a transaction. The issuer reviews the complaint and any available evidence.
STEP #2:A conditional refund is issued to the cardholder. The merchant’s account is debited the amount of the original transaction, along with any applicable fees.
STEP #3:The issuing bank assigns a numeric reason code for the chargeback, then electronically transmits all the chargeback data to the merchant’s acquiring bank.
STEP #4:The acquirer reviews the refund request. If possible, the acquirer may simply resolve the issue; if not, the claim is forwarded to the merchant.
STEP #5:The merchant has the option to accept or challenge the customer dispute. Bank chargeback fees apply in either case.
STEP #6:A merchant who disagrees with the cardholder’s claim will submit a response and supporting evidence to the acquirer. This is called “representment,” because you’re literally re-presenting the transaction to the bank.
STEP #7:The acquiring bank will electronically re-present the chargeback dispute information back to the issuing bank, who will then review the information. One of three things will happen:
- The issuer rules in favor of the merchant.
The transaction amount is again charged to the consumer’s account, and the funds are returned to the merchant’s account.
- The issuer rules in favor of the cardholder.
The issuer’s case stands, unless the merchant chooses to pursue arbitration.
- The merchant wins, but the issuer files a second chargeback.
The issuer has the right to file a second chargeback, (called a pre-arbitration chargeback by Visa) for the same transaction.
Are Fraudulent Customer Disputes Really a Problem?
Considering how much time, revenue, and other resources they stand to lose, it’s easy to see why merchants are concerned about wrongly-filed customer disputes. How big is the problem, though?
Research conducted by Chargebacks911® reveals that only 14% of consumers contact a merchant before filing a chargeback. Another study finds the majority of chargebacks are filed out of convenience: 81% of chargeback-filing consumers said they simply didn’t have time to contact the merchant. To the buyer, a customer dispute with the bank just seemed like an easier solution.
Consumers may only see it as a harmless convenience, but merchants are experiencing a painful revenue drain from this “cyber shoplifting.” BI Intelligence estimates friendly fraud costs $30 billion annually and increases at a rate of 41% every two years. True chargeback costs could be significantly higher, though. So, why is no one doing anything to stop the proliferation of this criminal act?
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The Picture is More Complicated than it Seems
The example above is actually a fairly straight-forward example of a customer dispute; the process—complex as it is—can get even more complicated. That makes it difficult to close all the loopholes that not only allow friendly fraud, but even encourage it:
- The increased volume of cases makes it difficult for banks to complete the necessary due diligence for each customer dispute. That encourages MORE disputes...and the cycle feeds on itself.
- If there is any legitimacy at all to a customer’s complain, the case will likely go to the cardholder. Banks are understandably reluctant to jeopardize customers’ trust.
- Card networks often don’t strictly enforce their own regulations or mete out punishments to those who fail to abide by them.
- Merchants often don’t fight invalid customer disputes, considering them an unavoidable cost of doing business.
- Misinformed customers erroneously equate a chargeback with a refund.
- Customers who successfully file a dispute are more likely to repeat the behavior.
Clearly, this process needs more than a quick fix in order to function effectively. The system was created over half a century ago, and was never designed with eCommerce in mind.
When Should a Customer Dispute be Used?
With so many invalid uses of the dispute process, are there any circumstances that legitimately call for a customer dispute? Of course.
There are times at which a chargeback is warranted. But, as the system was designed, there are only two circumstances where that’s the case:
Criminal FraudThrough identity theft or other means, criminal fraudsters have made purchases using the cardholder’s account. Even this is not automatically cause for a customer dispute, as modern banks typically take care of any charges stemming from criminal fraud, with minimal cardholder involvement.
Merchant MisconductIn rare cases, a cardholder may legitimately suffer at the hands of an unscrupulous merchant, or one with bad business practices. In such instances, a customer dispute may be required. However, the cardholder must make a good-faith effort to resolve the issue with the merchant before contacting the bank.
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While those are the only instances where it may be appropriate to open a customer dispute, there are multiple situations that often result in a dispute. Below are some easy steps merchants can take to avoid transaction dispute situations:
- Prominently display contact information. Including email address, website, and phone number.
- Simplify policies. Consumer-friendly policies may include no-hassle returns, extended refund deadlines, postage-paid returns, and so on.
- Provide 24/7 customer support. Customer dispute forms are available all hours of the day and night; merchants should provide similar accessibility.
- Clarify billing descriptors. Billing statement descriptors should clearly identify the merchant, so cardholders can recognize the transaction.
- Keep customers in the loop. Merchants should alert customers when goods have been shipped, or if they have been backordered or delayed.
- Send alerts for upcoming billing. Customers should be notified before a merchant processes a recurring transaction.
With Customer Disputes, Prevention is Key
Merchants should remember that the easiest way to win a customer dispute is to keep it from happening in the first place. If you’re a merchant being burdened with invalid customer disputes, Chargebacks911 can help. Contact us today to learn about a no-obligation ROI analysis.