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Also in This Issue: Why are there So Many Companies to Handle Chargebacks? (MAG Quarterly- Volume Six, Issue Four)

By Dean Sheaffer, SVP Financial Services/Chief Compliance Officer, Boscov’s

December 6, 2018

In our industry, many companies and products exist to handle various processes related to fraud and chargebacks. Why is that?

This question keeps coming to mind – why does our industry need so many companies and products to handle various processes related to fraud and chargebacks?

I have some observations and some additional questions that payments industry stakeholders need to address so that we can fully understand how and why chargebacks are such a difficult issue in the U.S. payments system:

  1. In the U.S. we adopted “Chip and Choice” for EMV as opposed to the “Chip and PIN” model adopted in virtually all other developed countries. Why is this so? Chip and PIN has clear advantages for authentication and fraud prevention.
  2. The card brands have made signature an “optional” cardholder verification method (CVM) in a tacit nod to the merchant community’s contention that signature is worse than having no CVM at all (since it provides a false sense of security to both the cardholder and merchant). Why did this change take years?
  3. We continue to use the terminology “Card Present” (CP) and “Card Not Present” (CNP) for transactions in an omni-channel world. Are “Buy Online Pick Up in Store” transactions CP or CNP? What about ship to store? What about order completion where a customer is physically in the store, but their order (or a component of their order) is shipped to their home? What rules should apply to these scenarios for authentication, authorization and fraud/chargeback liability? Who decides?
  4. Global and Regional Standards are being developed without full, impartial and equivalent input from all stakeholders. Why do merchants not have full voting rights in the development of standards such as EMV, 3DS Version 2, and Secure Remote Commerce (SRC)?  Each of these standards have profound effects regarding the processes whereby stakeholders authenticate and authorize transactions. Each of these standards can change the playing field with regard to fraud and chargeback liability.
  5. While bad actors avail themselves of the latest technologies, payment systems stakeholders continue to try to fix a disco-era system with short-term patches that do not address the underlying, fundamentally broken nature of payments as they exist today in the U.S. Fraud, chargebacks, and data breaches, which harm all of our reputations and the trust our customers put in each stakeholder, are the result. How long will we let this continue?
  6. When we look outside of the U.S., we see evolving payment systems such as Alipay and WeChat Pay. How long will it be until these systems leapfrog the U.S. payment system?  What are the implications for the U.S?

After we think about some of these questions (and if we are faithful to the objective of driving fraud out of the U.S. payment system rather than just trying to gain the best position regarding who “pays” for fraud) some of the reasons for the existence of so many companies and products related to fraud/chargeback detection and management will become apparent. 

Simply put - these companies exist as a “patch” to help payments system stakeholders manage an archaic, overly complex, one-sided, ever-changing, costly and risky system for which all but the largest stakeholders have insufficient expertise to manage themselves. These companies and products fill a niche that should not exist in the first instance.  

Looking forward, we will see either the number of companies trying to patch our broken system grow or we will see a paradigm shift in how the U.S. handles payments.  It is up to us to choose which of these paths we will take.