As if rising credit card risks and accounting changes under Current Expected Credit Loss (CECL) bring gloom to quarterly reporting, the industry must also watch for an increase in disputed payments, as the American Banker reports in today’s read.
There are three concurrent issues to watch: specific verticals, such as travel and entertainment, experiencing disruption with COVID-19 related lockdowns; call centers contending with credit management issues; and, e-commerce transactions rising as people stay at home.
The American Banker reports:
- But the COVID-19 crisis has also given rise to a second problem: a sharp increase in the number of disputed card transactions, as airlines have canceled flights, performers have postponed concerts, and supply chain disruptions have delayed the delivery of many goods.
- In June, chargebacks that were not due to fraud were 23% higher than during the same period a year earlier, according to e-commerce data released Wednesday by the payment processing firm ACI Worldwide. A Mastercard executive estimated that the increase in requests for consumer refunds has been even larger — somewhere in the range of 35% to 40% higher than last year.
- “There’s no question that the number of chargebacks has increased,” said Marie Russo, a senior vice president at Mastercard who is responsible for dispute resolution management, “just due to the circumstances around COVID.”
As Mercator Advisory Group projected in a pre-COVID research report, credit card issuers will deal with 25 million disputed items on 66 million credit card transactions by 2022. But as the American Banker notes:
- It is not just banks that have gotten slammed with phone calls from dissatisfied consumers. Many retailers are in a similar position, in part because shelter-in-place orders impacted their ability to operate call centers effectively. “Some merchants that we work with,” said Erika Dietrich, a vice president at ACI Worldwide, “just didn’t have the ability for their call center staff to work from home.”
- The travel and entertainment industry, which does not typically deliver physical goods, but instead offers experiences that require people to leave their homes, was especially hard hit, particularly in the early days of the pandemic, according to Jodie Kelley, CEO of the Electronic Transactions Association. “Certain merchants are just getting flooded with requests,” she said.
Payment networks recently overhauled their dispute processing requirements, and the timing was right, given the influx of disputes.
- The pandemic has also presented new challenges for Visa and Mastercard, which play a key role in managing the disputes that arise between card issuers and merchants.
- In May, Visa announced that it would waive COVID-related dispute fees for merchants. Typically, merchants who meet certain thresholds of disputed transactions have to pay certain penalties. Visa also implemented a COVID-19 dispute monitoring program to help reduce the volume of invalid disputes entered into the system.
- Mastercard has published answers to frequently asked questions about the kinds of disputes that have been arising during the pandemic. In a scenario where the customer chooses not to board a flight because of a mandated quarantine at the destination,the Purchase, N.Y.-based card network says that there are no chargeback rights. The same is true for air travelers who purchase tickets but are not allowed to board flights because of either their nationality or a medical condition.
The impact is not just to the credit card issuing buy-side. It also affects merchants on the sell-side, as the Banker notes:
- The sharp rise in disputed purchases has also had big implications for the financial institutions that process card transactions for merchants. Amid the pandemic, Square began holding back 20% to 30% of the money that it was collecting from customers of certain retailers, the New York Times reported in June.
- The reserves angered some merchants that use Square, because they threatened to tie up the small-business owners’ cash for months.
Square said in June that only 0.3% of its sellers have such reserves on their accounts. It noted that when the macroeconomic environment shifts, the likelihood of chargebacks may increase in certain industries.
Many issuer websites allow consumers to generate a transaction dispute online. Effective dispute management is an essential countermeasure against fraud. Disputes can often be an early predictor of account-level fraud, so aside from the regulatory requirements, effective dispute management is in the interest of credit card issuers.
But, with current call center backlogs, if you are contacting a credit card issuer, you might just want to have a good book handy, or some printed readings from the American Banker! Transactions must be irrefutable to ensure confidence in the payments system.
It could make hold times more enjoyable than the recorded announcements.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
