CardsFTW #121: No One Wins a Chargeback

Plus, Updates to US Bank Altitude Connect and Rocket Visa

During our fraud discussion in CardsFTW #102, we discussed friendly fraud and other chargeback-related costs. The number and cost of chargebacks are growing tremendously. As The Wall Street Journal noted earlier this year, "Reversing a Credit-Card Charge Has Never Been Easier—or More Abused."

Inside the industry, we often talk about who "wins" a chargeback: the cardholder or the merchant. The truth is more straightforward: no one wins with a chargeback. They're bad news for everyone.

Let's start with the cardholder, for whom the right to initiate a purchase transaction dispute is one of the best features of a payment card product. If you make a cash-based purchase and later disagree with the merchant about the quality of service or delivery of the product, you are pretty much out of luck. You can argue with the merchant and threaten to write a nasty Yelp! review, or write to the Better Business Bureau or your state Attorney General if you think it's really bad. However, your chance of recovering funds is very low.

If, on the other hand, you use a card product from a major network brand, you have the right to dispute a charge. While many disputes start with reported fraud of "I didn't buy that" (also where a lot of friendly fraud starts), you also have the right to say, "That merchant treated me poorly."

I try to use merchant disputes judiciously, but I can think of a few examples in my life where the card network saved me hundreds of dollars when a merchant failed to deliver a service or a product was not as described. In the 1990s, I purchased components to build a desktop computer from a website for about $2,000, but then the company appeared to go out of business before shipping me the product. Thankfully, my card company returned the funds to me.

For merchants, the ability of cardholders to dispute charges is mostly a headache. The value merchants get from cards in protection from consumer fraud is that there won't be bounced checks or counterfeit cash. However, if a consumer files a dispute, the card network will come to the merchant to ask for evidence of the charge for adjudication.

In the standard four-party system with Visa and Mastercard, dispute adjudication is a key function of the network. If a cardholder claims that they didn't make a purchase, the network asks for evidence that the merchant accepted the card properly, received a real-time authorization, has a signed receipt or video of the cardholder purchasing at their location, etc. If a cardholder claims that the good or service was deficient, the merchant has to provide evidence that they tried to fix the situation or that the cardholder got what they paid for. Once the network adjudicates the chargeback, there are two possible outcomes: one, the consumer loses, and the merchant keeps the money; two, the merchant loses, and the consumer is refunded.

There is also the scenario in which the merchant wins and keeps their money, but because of zero-dollar fraud liability guarantees, the issuing bank eats the cost and still provides the user a refund.

Because processing a dispute is expensive ($15-25 per case at a minimum), small-dollar disputes are often automatically given to the consumer, provided that they don't have a history of creating frivolous disputes. As we explored in #102, providing better merchant data can go a long way towards minimizing disputes, going from "Was that me?" to "Yes, that was me" for consumers who may be confused.

New entrants like Casap are also using modern technology to automate and enhance the dispute process, reducing the cost of processing, which has traditionally been very manual.

Merchants also have choices in terms of ensuring that all cards are authorized in real time (vs. delayed) to ensure their validity. Online merchants can use 3DS to ask for verification that the consumer is who they say they are or use mobile wallets like Apple Pay. Both of these methods shift liability for fraudulent purchases to the bank from the merchant.

Many merchants in the US don't use 3DS because there is friction in the checkout, and they are willing to pay some dispute cost in exchange for higher sales volume. (Ironically, asking for 3DS in the US now may indicate to a bank that you are a high-risk merchant.) European PSD/2 requirements mean that 3DS is much more common.

While consumers hate fraud, they also hate false negatives (that is, being denied for a charge that they want to make). As consumers become more security conscious, I think we can expect to see more 3DS experiences on the web and in person that pair a phone-based MFA code with a purchase. These steps will reduce the incidence of stolen card fraud but don't solve bad merchant behavior.

All this is to say that no one wins when we get to a chargeback. Neither side wants to deal with it; it's expensive and can frustrate everyone. I have met many consumers who won't bank with a particular brand due to a failed dispute (e.g., Bank X denied my dispute, so I closed all my accounts and will never bank with them again). The best thing we can do is reduce chargebacks, even if it introduces a little friction.

Quick Notes

US Bank announced some changes to its Altitude® Connect Visa Signature® Card, removing the annual fee, introducing a 100% charity points match, and new earnings limits and structures. In addition, a $30 annual credit for streaming disappears entirely. It's a lot of fine print, but most notably, it's a weird move in the redemption. While points to cashback to an "eligible US Bank Account, charity donation, or travel redemption" is $0.01 per point, points for pure statement credits are reduced to $0.008.

Sometime in May (based on Wayback Machine sleuthing), Rocket removed the annual fee on their Rocket Visa Card. Originally started as the TrueBill card before Rocket's $1.2B acquisition of TrueBill, this Deserve-powered card is a sleeper in the debate about real-estate cards like Bilt (and upcoming offerings from Mesa and MCard). If you are a Rocket customer or plan to be one, you can earn 2% cashback daily on purchases or 5% towards new home closing costs. Plus, the card includes Porch Piracy Protection, one of my favorite new Visa protection tools, usually only seen on credit union cards.

Cardholders without a Rocket mortgage get 1.25% cashback. 5% cashback on a no-annual-fee card is astounding. There is a big caveat: you have to get a Rocket Mortgage, but Rocket is the second-largest mortgage originator in the US (Home Mortgage Disclosure Act data via Lending Patterns, April 2024), so many people could benefit from this.

HBO Max for Free. The contortions you can undergo for card benefits these days: Walmart announced a new deal that provides ad-supported Max streaming to all Walmart+ subscribers. The AMEX Platinum provides a $12.95 per month credit for users to subscribe to Walmart+ (which feels like a set of non-overlapping circles in a Venn diagram, but I must be wrong). So, with my AMEX, I can get free Walmart+ and, in turn, get free Max (except I have to watch ads). At least this is better than HBO’s deal with DoorDash. DashPass members also get free access to Max, but not people who get DashPass via their credit card; you have to actually pay for it.

CardsFTW

CardsFTW, released weekly on Wednesdays, offers insights and analysis on new credit and debit card industry products for consumers and providers. CardsFTW is authored and published by Matthew Goldman and the team at Totavi, a boutique consulting firm specializing in fintech product management & marketing. We bring real operational experience that varies from the earliest days of a startup to high-growth phases and public company leadership. Visit www.totavi.com to learn more.

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