The Consumer Financial Protection Bureau (CFPB) was created in 2011 to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the marketplace. In November 2022, based on its financial structure, the U.S. Court of Appeals for the Fifth Circuit ruled that the bureau was unconstitutional. The CFPB has appealed the ruling to the Supreme Court; a final decision is expected sometime this year.(1)
Spike in chargebacks
What effect this will ultimately have on consumers’ financial safety remains to be seen. Meanwhile, consumers, financial institutions, and retailers—especially online vendors involved in card-not-present transactions—are dealing with an unexpected spike in chargebacks.
Chargebacks occur when a consumer reports a transaction issue with their financial institution, such as a fraudulent credit card charge or if they’ve been swindled by a bad-faith merchant. The issuing bank can then charge back the transaction by reversing the payment from the vendor while a pending investigation ensues. Increasingly, these situations are cases of “friendly fraud,” where the consumer knows perfectly well that he or she made a valid purchase but does not wish to pay for it.
Chargebacks are expensive
When a chargeback is initiated, the merchant is burdened not only with the loss of revenue from the sale but with chargeback penalties, alert and processing costs, and administrative fees that cost the merchant $3.75 for every dollar lost to fraud, on average. Moreover, the chargeback fee the bank assesses is non-refundable, even if the merchant successfully contests the chargeback. Our internal figures at Chargebacks911 show the average cost of 2023’s projected 615 million chargebacks will be $191, for a total of $117.6 billion.(2)
The road ahead
Most of this per-incident cost burden stems from an antiquated and overly complex system for investigating and resolving chargeback disputes. Fortunately, the difficulties attendant on chargeback defense are being greatly eased by (a) the emergence of companies skilled and experienced in dealing with these matters, and (b) companies in the fintech sector that are essentially automating chargeback defense and taking the load off overstretched managers and back-office employees in the affected industries.
More dispute or transaction inquiries, in fact, could be a good thing. It makes sense that consumers want to contact their bank instead of multiple retailers when they wish to cancel a subscription, reship a product, or cancel an order. The problem exists when these inquiries are misclassified and categorized as “chargebacks,” which is the only existing railway to trigger a response from the retailer. As a result, there should be “breeds” or “classes” of chargebacks, supported by having the right data and technology. It’s not enough to provide systems that are smarter, faster, and more secure; they also must be more transparent – a fortunate byproduct of digital innovation.
To be successful, the way forward needs to include win-win-win solutions; we need to bridge the communication gap that creates the chargeback requirement in the first place and provide avenues to more efficient, data-driven decisions. Consumer behaviors have evolved to where a chargeback is, often, a fundamental request for more information and customer service attention. The opportunity to improve this mechanism is wide-reaching and within reach, given more open doors to innovation.
Tech needs to lead
As we said, the Supreme Court will ultimately decide the fate and future of the CFPB. If it is shuttered, we know there will be sweeping changes taking place in the financial services industry. Before that happens—right now, in fact—is the ideal time for vendors to innovate and make sure they are prepared to operate smoothly when current regulations are disrupted.
About Monica Eaton, Founder and Chief Evangelist, Chargebacks911
Monica Eaton is the Founder and Chief Evangelist of Chargebacks911. Chargebacks911 is the global leader in chargeback prevention and remediation technology. As a provider or supplier to financial technology companies, Chargebacks911 helps safeguard more than 2.4 billion transactions per year on behalf of clients in 87 countries around the world. For details on Chargebacks911’s comprehensive dispute management solutions, visit https://chargebacks911.com
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- “Consumer Agency Asks U.S. Supreme Court to Review Case That Invalidated Its Funding.” Reuters, Thomson Reuters, 15 Nov. 2022, reuters.com/legal/government/consumer-agency-asks-us-supreme-court-review-case-that-invalidated-its-funding-2022-11-15/.
- “What’s the Annual Cost of Chargebacks? the Truth Will Shock You.” Chargebacks911, 12 July 2022, chargebacks911.com/chargeback-costs/.
By Monica Eaton, Founder and Chief Evangelist, Chargebacks911
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