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Payments fraud doesn't begin and end with stolen credit cards. There are sophisticated international networks of criminals who dedicate their entire lives to scheming and scamming merchants and consumers for every cent that they can extract. But there are also experts in the payments fraud field who are actively fighting back. True Fraud features real-life stories of the battles that are raging across the world, one transaction at a time.
Welcome back to your podcast, True Fraud. We're here with Vinay Shiriwastaw from Dispute Help, and we're very happy to have you here.
Vinay Shiriwastaw:Yeah.
Pablo Torres:Thank you so much for coming out. Today, we're going to talk about kind of like the bigger umbrella of chargebacks, the new products that are coming up in the market, how they're affecting the the environment, the payment environment, and how how we can leverage it. Yeah. Why don't we start with, you know, kind of like a basic question, what are chargebacks? Where do they come from?
Pablo Torres:What's their origin? How do they affect the the the, payment environment?
Vinay Shiriwastaw:Yeah. I mean, if you think about, a chargeback, really, it's a it's a mechanism that was built and designed to protect the consumer, somebody buying a good or service. And it hearkens back to, really when the establishment of the credit card industry came about. And that happened in the in the 1960s where, you know, Bank of America, as you know, which is now Visa, issued the first credit card, where they deemed somebody credit worthy and put value on a card. And as soon as that happens, by the natural state of human beings, 2 things happen.
Vinay Shiriwastaw:Abuse. Of course. And and abuse happens on, the consumer side, where other people are now stealing your card, your identity, and then using your line of credit for their malicious, acts. And on the merchant side, you are trying to get over on a consumer. You might sell a good or service that is not, how it was depicted.
Vinay Shiriwastaw:Its quality wasn't what was said. It was malfunctioning. So, really, chargebacks stemmed from the Fair Credit Act of 1974, which put in place protection for consumers. And and those protections, as as I said, are were predominantly designed to do 2 things, protect the consumer from fraud, somebody stealing your card and using it, And then number 2, protect the consumer, on the merchant side. If a merchant didn't deliver a good or service as was rendered to the consumer, then the chargeback allowed for the freezing of those funds, those funds to go back to the consumer, and a process to take place in which parties would try to mitigate and figure out who is in the right for that dispute or chargeback.
Pablo Torres:Yeah. It's it's very interesting to think how things have evolved, but then some things basically remain the same. Right? There's always a kind of the abused part of of the system, the ecosystem, and then there's the part of, you know, now there are so many other security checks, and there's so many other, you know, policies around, like the protection for the card holders. So why don't you tell us a little bit more about that progression?
Pablo Torres:You know, so we had chargebacks, and then what happened after that? There's got to be another way that right now the payment industries is protecting not only merchants but also the cardholders. Mhmm.
Vinay Shiriwastaw:One of the key things that that we should discuss is, along these lines, and this is getting a little advanced. But how did a process designed to protect the consumer become a situation where now the consumer is abusing that process? And and when you have fraud, you have, right, nondelivery of goods. But but what is rampant now is friendly fraud, in which a process designed to protect a consumer is now being used to actually hurt the merchant ecosystem. Mhmm.
Vinay Shiriwastaw:In which somebody knowingly has bought a good or service or their household has knowingly bought a good or service, but you're using the chargeback guidelines to say, I didn't do that transaction or something wasn't delivered when indeed it was fulfilled by the merchant. And that, you know, essentially friendly fraud is now 60 to 70% of of the chargebacks, right, that that happened. And so it hearkens back to what I just said is how does a system designed to protect the consumer become such a thing in our world today? To your point, what was the progression that now it actually is is abused by the consumer to a degree? It does protect the consumer still.
Vinay Shiriwastaw:Let's not let's not, you know, take away from that. But but it is it is an abusive practice today. And so when you look at, the players in in the chargeback ecosystem, right, you have multiple players. So we quickly will examine that. But you have the consumer, the cardholder.
Vinay Shiriwastaw:You have the issuing bank, the bank that issues the card to the consumer. You have the merchant, of course, where the goods and services are bought. You have the acquiring processor, the merchant acquirer. Right? And across those processes, a chargeback is issued by the consumer.
Vinay Shiriwastaw:The issuing bank will examine that and see if it's valid to send. They'll send it to the card schemes. The card schemes will send it to the acquiring bank, and the acquiring bank will then send it to the merchant. All the while, if it's a valid chargeback as seen by the issuing bank, the funds are frozen, taken away from the merchant, and placed in limbo. Mhmm.
Vinay Shiriwastaw:And then that whole cycle goes the other way. Then the merchant will put together compelling evidence and send it to the acquiring, processor. The acquiring processor will see if this is good enough to send. They'll send it through to the card schemes to the issuing bank. The acquiring the acquiring processor will make a recommendation.
Vinay Shiriwastaw:But the issuing bank really has the final say on where that liability sit sits, and they'll determine is my consumer correct or is the merchant correct, and then the funds will move be moved accordingly based on that decision making process.
Pablo Torres:You know, you said something critical there where the part of the issuer makes the decision.
Vinay Shiriwastaw:Yes.
Pablo Torres:There's this misconception that I run into a lot with people where they think that when you file a dispute, it never hits the merchant. You know, like me as a consumer, if I file a chargeback, I always think that the card schemes are going to absorb that loss, but it always goes back to that merchant. And then on the other side, you know, if you were a merchant, then there's a lot of misconceptions or maybe just, you know, misunderstanding as to how that flow works. And they think that somebody else is making the decision. You know, maybe the acquirer or the, you know, the payment facilitator is making the decision as to who is going to win that dispute.
Vinay Shiriwastaw:Mhmm.
Pablo Torres:And it always goes back to the issuer. Right? Yeah.
Vinay Shiriwastaw:Yeah.
Pablo Torres:I think that's that's a very, important point of information that we should note that it's always the issuer who makes the decision. So what are, we're talking about the kind of that representment flow. What are some of the flaws that you see nowadays with that whole process? Because that seems like a pretty there's a lot of middle people in in that in that flow.
Vinay Shiriwastaw:Well, I mean, I would say the flaws in the process is what we just examined if you think about how many players we just talked about. You know, this is a very static process, and it's a very regimented process. And it's going from 1 cycle to 1 cycle to 1 cycle to 1 cycle. And it's not very fast if you think about what we just talked about. The inherent problem, right, in my opinion is is is it's humans making these decisions, and it has to be that way because this is the representment, you know, it's not technology making these decisions.
Vinay Shiriwastaw:It's humans making these decisions, and a human is looking at compelling evidence as put together by the merchant and sent over through many means and is now sitting on the issuer. And then a human being is looking at that and making a determination who's right. That's tough. I mean, you know, have you put it together enough compelling evidence? It's received as as PDF static.
Vinay Shiriwastaw:Right? It it it's not today today's date. It's still not a video file or something like that or, you know, any real time processes. So there people make errors and and it's subjective. And that's problematic.
Vinay Shiriwastaw:And number 2, I I would say that if we just talked about what we just talked about, how costly is that? Right? You know, the the unit economics for everybody in in that or not everybody, but a lot of those players, the issuer, the acquiring processor, and particularly the merchant. What a severe impact to take time out of your day. I'm, you know, producing movies to sell digitally.
Vinay Shiriwastaw:That's the business I'm in. And now I have to station people and have them understand the process that is really not what I'm in business for.
Pablo Torres:Mhmm.
Vinay Shiriwastaw:There's a tremendous cost impact to a merchant. We we deem it anywhere from, you know, 20 to 70 to a $100 to action a chargeback at the merchant side. That's a tremendous cost. You know, what if you what you're selling is only $19 and you're paying you have man hours, people, a downward impact on your finances, actioning a chargeback or or or representing it. So I think those are in the big when you look at the big rocks, those are the inherent problems.
Vinay Shiriwastaw:And then there's not much you can do about it because the notification is coming later. So, you know, there's not time to act as a merchant. You're waiting for this thing to happen, then you're sending it back and you're waiting. Mhmm. And so that speed to action isn't there, and we're used to faster speeds as as society now, obviously.
Vinay Shiriwastaw:So I think time, money, process, you know, these are these are severe impacts of of the representment channel that happens today.
Pablo Torres:I think there is this, misconception, you know, from from a lot of and I've heard this fairly often in the industry where if I get ahead of the chargeback or if I get, if I send the correct data for the representment and I win the chargeback, that chargeback doesn't count towards my monthly threshold, let's say. And I think, like, how often do you do you hear this still in the industry?
Vinay Shiriwastaw:I think it's pretty common. I mean, I I think you touched on something, you know, pretty important that it's an if then statement that happens at the at the merchant level. Right? If I do this and I do things properly, then I don't have a a chargeback problem. Anytime for any reason code and chargebacks are classified by reason code, anytime that chargeback fully happens at the consumer and issuer level and gets passed through the ecosystem, the ecosystem we described, it is a chargeback.
Vinay Shiriwastaw:It is a chargeback going against acquire counts, of chargebacks and going against merchant counts. And, you know, merchants are required to maintain a balanced threshold of of chargebacks. Very typically, the rule of thumb is the associations like a merchant to be under 1%
Pablo Torres:Mhmm.
Vinay Shiriwastaw:Of of chargebacks. Right? That's the number of chargebacks by by number of transactions. Mhmm. So, you know, typically, they they like merchants to be under 1%.
Vinay Shiriwastaw:So, you know, even if a merchant does everything right on the representment side, that chargeback still is a chargeback. It is there's a particular file that it goes on and it counts against that merchant. The only way to to head that off is to use one of these Products. Tech products. Yeah.
Vinay Shiriwastaw:This technology. Right? These pre chargeback alerts, consumer clarity, order insights, compelling evidence. These are tools that if I you know, take away that chargeback. Mhmm.
Vinay Shiriwastaw:So these are things that that don't that when used properly and when used effectively, mitigate the chargeback and and don't have that chargeback impact to ultimately to the merchant.
Pablo Torres:Yeah. I think that's a a very useful tool. Vinay, so you you're talking about this representment process that you're talking about the the abuse that we're seeing with friendly fraud. You know? So what what comes after this?
Pablo Torres:You know? How what are the tools or how how is one as a merchant or a consumer supposed to utilize what's available right now?
Vinay Shiriwastaw:Yeah. You know, you hit the nail on the head. We talked a lot about the history and and a process that was built. The question is, since we're in a world of technology, what technology is being put forward to defend the merchant, just continue to defend the consumer, and modernize a process that is traditionally not seen much modernization in a in a very long period of time. Love to talk about, those things with you on the next one.
Pablo Torres:Yeah. Absolutely. Yeah. Look forward to it. Thanks so much for for joining us.
Pablo Torres:Don't forget to subscribe. Thanks so much for listening to our podcast True Fraud. Again, my name is Pablo Torres, and this is Vinay Shiriwastaw.
Vinay Shiriwastaw:Brought to you by the reach network. Visit with reach.com/network for more.