A deluge of chargebacks is headed toward the payments industry, spurred by the coronavirus, as all areas of the global economy have been upended.
In an interview with Karen Webster, Johan Gerber, executive vice president of cyber and security products at Mastercard, said that many companies are being inundated with disputes and cancellations, and with demands to refund consumers’ money — a trend that will branch out from travel and leisure verticals and into other segments.
The payments ecosystem, of course, is not and will not be immune to the seismic impact and aftershocks of the coronavirus. The effects are most immediately felt by the travel and hospitality verticals, along with a number of eCommerce segments. Purchases, events and trips are being canceled.
“We are living in history-making times,” said Gerber — and the groundswell of chargebacks is just beginning.
We might refer to this current environment, bumpy as it is, as the calm before the storm.
And as to where the clouds are gathering? Gerber noted that in the Asia-Pacific region, Mastercard did not see what he termed “the spike” in chargebacks until “much, much later. In fact, the January-February timeframe is when the spikes started coming in.” The pattern in Asia showed an initial increase in refunds followed by an increase in chargebacks.
"If we view Asia-Pacific as a leading indicator, the current increase in refunds in the rest of the world will be followed by a steep increase in chargebacks," Gerber predicted.
Girding For Operational Churn
As consumers and businesses clamor to get their money back for trips that won’t be taken or events that won’t be attended (or that have been canceled), operational churn will be a hallmark for many firms.
As Gerber explained, a consumer who calls the airline may get a reimbursement to be credited to a travel account. The consumer, not seeing a reimbursement going directly into their account (viewed via mobile app), may perceive his or her call to the airline as an unresolved dispute.
“The consumer may not have read the terms and conditions of the sale with the merchant,” said Gerber. Merchants must consider categories of consumers in accordance with the terms of each specific transaction — those who are entitled to get their money back, those who can get a store credit/travel voucher or those that cannot get a refund. Gerber said that many merchants have been “going the extra mile” by offering credit or vouchers even for transactions that were not entitled to a reimbursement. In addition, there are complex scenarios where the consumer feels they are entitled to a reimbursement because the cancellation was not their decision and the terms are not clear, given the COVID-19 circumstances. Regardless of the circumstance, said Gerber, Mastercard fully supports a cardholder’s right to a refund when one is required by the terms and conditions.
Delving into the mechanics of the churn itself, Gerber said the formal chargeback process is elaborate and can take as long as 120 days. When a consumer calls the bank to dispute a charge, it may involve as many as three cycles of claims and counter-claims, while the amount moves between the merchant and the consumer’s bank for every cycle. Thus, the formal process can stretch over months.
The process may be especially complicated and slow-moving, as so many members of issuing banks and merchants are, by necessity, wrought by the coronavirus, working from home in hastily fashioned, distributed workforces.
“In the meantime, the money has moved three or four times between different accounts," noted Gerber.
Chargeback disputes can have a huge impact on travel merchants’ operations, he told Webster. In the past, they would represent about half a percentage point of typical transaction volume — but over the last few weeks, they could top as much as 20 percent or 30 percent. That’s quite a bit of friction in the process, and could create at a liquidity crunch for many firms.
As a means of streamlining the chargeback resolution process, Gerber said that Ethoca, a collaborative fraud and customer dispute intelligence company acquired by Mastercard in 2019, helps the parties electronically communicate the facts of a given dispute before it becomes a formal chargeback. He maintained that the process can be resolved in as little as 24 hours rather than the aforementioned 120 days.
“Instead of moving money back and forth between the parties, Ethoca can help exchange information between the parties and that transparency benefits everyone, including the consumer,” said Gerber. “The moment a consumer calls the bank to dispute a transaction, we immediately inform the merchant about the dispute.”
Now the merchant has an opportunity to demonstrate that they have given the end customer her money back, and Ethoca can let the bank know that the disputed transaction has already been resolved — or, perhaps, that a voucher has been issued.
As Gerber noted, with a nod to the current turbulence being experienced by the travel industry, Mastercard is offering Ethoca’s dispute resolution services free of charge for merchants through the next three months.
"We think this could bring a lot of relief right out of the gate, because we already have issuers all around the world on the Ethoca network," said Gerber.
He added that Mastercard has been keeping an eye on other verticals that might see a flood of returns, cancellations and chargebacks — including eCommerce and subscription-based businesses, such as gyms.
“You can see where this is going to all of a sudden become a very big pain,” Gerber said of operational churn and disputes, “and we don't want that to catch them off-guard or come as a surprise.”