Revolutionizing Chargeback Management: A Guide to Automating Manual Reviews

Chargeback management has come a long way since 2010 –when the eCommerce community was first introduced to the concept of friendly fraud.

Before 2010, specifically before the economic downturn of 2008, managing chargebacks was pretty straightforward. Chargeback reason codes predominantly reflected the consumer’s contention, making payment dispute resolution seamless.

But then recession-induced scams began to trickle in, coupled with massive data breaches of 2013/2015, where private details of over 6 billion consumers became compromised and used to make unauthorized transactions. Managing chargeback became a nightmare for CNP merchants due to ever-changing rules and unpredictable consumer behaviour.

Fast forward to 2019. The global pandemic caused significant financial strain on consumers. Payment fraud and chargebacks began to shoot through the roof as many cardholders sought to maintain their pre-pandemic lifestyle despite liquidity challenges.

Incidentally, chargeback management became much more than simply pairing reason codes from the issuing bank with select documentation to win a case. It demanded tools and frameworks to pierce through the corporate veil of the cardholder’s intent…and pre-empt revenue losses at scale.

Considering the tremendous economic gains of automating manual reviews for faster, more accurate representment, we share this guide to help you make informed chargeback mitigation decisions. 

The Chargeback Life Cycle is an Uphill Journey

Every CNP merchant understands the pain of managing chargebacks today. 

Traditionally, the chargeback life cycle is supposed to be a simple process comprising the card issuer, merchant acquirer, merchant, and cardholder (if they initiated the dispute). 

But that’s not always the case. In most instances, the chargeback cycle involves multiple, complex steps, making it extremely time-consuming and resource-intensive. 

Below are the procedures involved in an ideal chargeback life cycle:

• Customer Inquiry

At the inquiry stage, the cardholder identifies a bill they claim they didn’t recognize or a transaction for which the merchant didn’t fulfil specific obligations. The customer then contacts their card issuing bank and tries to reverse the transaction.

•  Dispute Investigation

Before granting the transaction reversal request, the issuer examines the cardholder’s claim for substance. They pair the cardholder’s complaints with supporting order-related documentation to ascertain the claim’s legitimacy. Card brands like Visa and MasterCard can retrieve transaction details with Visa Resolve Online and Mastercom. If they determine the cardholder’s claim is substantial enough to warrant transaction reversal, they’ll escalate the dispute to the next stage of the chargeback cycle.

• Awarding Conditional Chargeback

The issuer will grant the chargeback request at this stage by forcefully withdrawing the transaction funds from the merchant’s account. They will remit a conditional refund to the cardholder, contingent on whether the merchant will dispute the case. The issuer will equally alert the merchant’s acquiring bank with a chargeback reason code indicating the cause of the dispute.

• Merchant Acquirer Review

Upon reviewing the documentation from the issuer, the acquirer will forward the details to the merchant. Ideally, they will also include any relevant data to help the merchant plan their next move. If you, the merchant, were using manual chargeback review, this is where things get dicey.

• Merchant Accepts or Rejects the Chargeback

If you wish to accept the chargeback and write it off as Cost of Goods Sold, the case ends at this point. Unfortunately, treating chargebacks as the cost of doing business isn’t worthwhile, as the chargeback cost far outweighs the transaction cost. With every transaction charged back, you incur significant ancillary expenses through chargeback fees, reputation damage, administrative burden, sustainability threat…and even opportunity cost.

But if you reject the chargeback, you can issue a rebuttal and potentially reclaim the revenue, which brings in the next step:

• Representment

Chargeback representment is a legal channel through which merchants dispute false chargebacks by sending their acquirer compelling evidence and a rebuttal letter to counter the cardholder’s claim. Some documentation considered compelling evidence include order shipping receipts, proof of delivery, or customer communication such as emails, texts, or Social Media posts affirming the transaction. In ideal instances, these tools can suffice to overturn the chargeback. However, as noted earlier, chargeback reason codes no longer serve as a single source of truth in determining the cardholder’s intent. That explains why most merchants have only a 12% chance of winning chargebacks.

• Issuer Examines Representment Case

After receiving the documentation from your acquirer, the issuer reviews your evidence and rebuttal letter to ascertain the merits of overturning the dispute. If they determine you have a valid case, they’ll rule in your favour and return the money to your account. But if they uphold the initial verdict, the cardholder will retain the funds. Visa calls this decision pre-arbitration, while over at Mastercard, they know it as an arbitration chargeback.

• Merchant Review Second Chargeback Documents

When the merchant receives the case outcome from their acquirer, they must decide whether to end things at this stage or fight back again. If you choose to submit additional evidence, your acquirer does not send the second presentment to the issuer, but to the card network, that is, Visa or Mastercard. The card brand has the final say at this point.

• Arbitration Chargeback Ruling

Upon reviewing all documentation from both parties (the issuer representing the cardholder and the acquirer representing the merchant), the card network will decide on the case. 

Unless supplemental evidence comes to light to restart the process, any party that wishes to carry the case further must take the matter to a court of law.

Why Chargeback Automation Yields Superior Value for Money

For the record, it’s possible to mediate chargebacks manually. Some merchants do that. But if you’re looking for maximal ROI and cost-effectiveness, it’s common knowledge that manual chargeback review and representment are not sustainable. The cost far outweighs the benefits. 

First, you must have dedicated staff and resources to examine transaction details, gather evidence, and communicate with relevant parties. Businesses that handle many transactions experience decreased operational efficiency due to such strains.

Additionally, the chargeback process is sequentially time-consuming, meaning companies using manual techniques will have extensive delays in resolving disputes. Such delays result in negative customer satisfaction, and in cases of fraudulent chargebacks, fraudsters have more time to exploit the loophole.

And since you don’t have much data to work with, you only rely on human judgment, making your case susceptible to inconsistent outcomes, as chargeback reason codes only tell you part of the story.

Again, distinguishing between genuine disputes and friendly frauds can be challenging. Without AI tools that automated systems like Chargeflow provide, reviewers must have a solid understanding of payment processes, regulations, fraud detection techniques, and customer behaviour to be efficient. Training and retaining skilled reviewers is expensive.

More so, dealing with customers, banks, and other stakeholders in the chargeback life cycle requires clear and effective communication. Miscommunication or delays in transmission often escalates the situation and affects relationships. And since chargeback regulations and policies vary across jurisdictions and are subject to change, keeping up with these changes is a full-time job. 

Plus, manual chargeback evidence gathering, evaluation, and dispute submission are painful. Inaccurate or incomplete documentation weakens your position during a chargeback dispute. And if a manual chargeback representment ends in an unfavorable decision, managing the appeals process means additional time and resource allocation. These complexities often lead to lost sales from genuine customers due to damaged brand reputation and decreased customer loyalty.

Given these significant challenges, businesses are progressively investing in chargeback solutions like Chargeflow for automated fraud detection systems with machine learning algorithms and AI-powered tools to streamline and enhance the chargeback process. 

Automating Manual Chargeback Reviews: Options to Consider

Now that you’ve understood the merits of automated chargeback management let’s examine existing solutions that can assure improved accuracy and frictionless workflow. 

After all, every chargeback automation system is not built the same. It’s imperative to find a solution that aligns with your business model. Selecting the right technology partner makes all the difference. 

That said, there are two main types of chargeback automation systems used in organizations. 

1. Hybrid chargeback solution: For hybrid chargeback solutions, you use a specialist firm to manage complicated chargeback claims while disputing low-level cases manually. For this approach to be practical, you must track transactions for such challenging disputes while relying on a full-service company for the actual dispute work. 
2. Fully automated chargeback system: This chargeback management solution provides hands-off dispute mitigation through automated evidence collection and dispute filling. Using chargeback automation helps you streamline dispute management processes with a single program offering top-notch fraud protection instead of onboarding multiple programs to manage different touchpoints. This approach is more reliable for eliminating the negative impact of chargebacks on your store at a low cost. 

Research studies indicate that businesses implementing automated chargeback management outperform those who handle chargebacks manually – with an ROI guarantee reaching up to 4x. Get the complete pros and cons analysis of these options here and here.

How to Measure Chargeback Automation Success

The economic gains of automated chargeback management over manual processes are like night and day difference. Here are some essential key performance indicators to help you quantify the benefits:

• Chargeback dispute efficiency. An intelligent dispute response framework pulls from over 50 data points, excavating the essential variables to give you the best chance of winning payment disputes.
• Decrease in chargeback rates. Account analysis based on your transaction history and fraud patterns helps your company prevent future disputes. Reducing the risk of chargebacks means maintaining excellent relationships with regulators, saving money from chargeback fees, and avoiding stringent penalties for excessive chargebacks.
• Enhanced customer satisfaction. Instead of devoting your working hours towards the uphill battle of recovering lost revenue, your team can allocate its full strength to innovating for category leadership and serving your clientele.

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About the Author:

Tom-Chris Emewulu is Chargeflow’s Digital Evangelist. With 8+ years of digital marketing experience, he crafts compelling, high-converting, high-intent, data-driven, SEO-friendly articles that put brands on page 1 of Google search. Forbes, DW, Business Insider, Businessss2Community, and many other publications have featured his works. You can find him on Social Media via @tomchrisemewulu.