Taking the Paperwork Out of Disputes

  Like so many other functions that generate a lot of paper, the process of handling disputed credit card transactions is rapidly moving onto the Internet.
  Processors and merchant acquirers for years have devoted much of their research-and-development budgets to automating the retrieval of paper sales slips, a costly, time-consuming process that begins when the cardholder disputes a transaction. Frequently, a dispute results in the sale being charged back to the merchant because the merchant can't find a signed sales slip.
  The chargeback process traditionally has been tilted in favor of cardholders. Not only may the merchant have to reverse a sale he thought he had simply for lack of a piece of paper, but even if he does have it, he's got to mail or fax it to his processor so it can be compared to the one the processor received from the cardholder's issuer.
  The whole process can leave merchants frustrated and angry, and when merchants are upset, their acquirers hear about it.
  "It's a tough part of the business; it's paper-intensive," says James G. Kelly, executive vice president and chief financial officer of Atlanta-based Global Payments Inc., a major U.S. merchant processor and now the biggest one in Canada.
  Retrievals and chargebacks are costly for merchant acquirers and issuers, too. According to Kelley Everetts, senior vice president of dispute resolution services at First Data Merchant Services, the merchant-processing arm of Greenwood Village, Colo.-based First Data Corp., a single retrieval can cost the acquirer $3 to $5. An actual chargeback adds another $10 to $15. Issuers can spend an equal amount on resolving a disputed sale.
  Merchants pay for chargebacks not only through reversed sales, but also through chargeback fees or higher discount rates. Thus, they have an incentive to automate the retrieval process and take steps to reduce chargeback exposure.
  For the majority of merchants, those who serve their customers face to face, the best defense remains a signed sales slip. But having it available is one thing, getting it to the processor quickly can reduce the potential for a chargeback and the expenses involved in the entire process.
  Today, there is no better way to move data around and make the information available to all who need to see it than the Internet. Thus it's no surprise that several major merchant processors contacted by CCM all are turning to new Web-based dispute-resolution products.
  Before the Internet came along, many merchant acquirers had already developed so-called expert systems to classify disputed transactions reported to them by card issuers. The idea was to automatically apply the correct processing rules from the voluminous chargeback rulebooks of the card brands, and reject disputes in which the merchant clearly was not at fault.
  First National Bank of Omaha's First National Merchant Solutions acquiring unit has a five-year-old internal chargeback-management system that initially resolved about 10% to 15% of disputes without involving the merchant, according to Senior Vice President Colleen Haack. But thanks to experience and refined technology, the system, which is built on a vendor's platform, now clears 25% to 30% of disputes without merchant involvement, she says.
  But in the past few years, First National, which has 150,000-plus merchant locations and handled nearly $32 billion in charge volume in 2002, has taken to the Web to automate the dispute-resolution process even more. One service, called XCaliber, is a Web-based chargeback system. With it, merchants can view the sales receipts sent to First National by the card issuer as well as related documents such as a cardholder letter describing the dispute.
  "It allows the (merchant) client to get a live outlook into their chargeback and retrieval requests," says Haack.
  One merchant claimed the system resulted in a 50% reallocation of the labor formerly needed to handle disputed items, according to Haack.
  First National built the service in partnership with Maryland-based Merlin Solutions. Haack would not disclose the cost, but says the bank's return on investment "was less than 12 months."
  Last year, First National added retrieval and chargeback data to its First InfoCenter menu of Web-based services for merchants. The dispute-related data are meant to help larger merchants monitor and track retrieval and chargeback trends in their card transactions. "This allows our customers to turn data into business intelligence," Haack says.
  First National is enhancing the service by adding third-party data, such as summary-level information from MasterCard International about fraud, chargebacks and retrieval data across industries or political jurisdictions. The bank prices First InfoCenter services by usage volume.
  First Data Merchant Services, the nation's largest merchant processor, also is moving into new Web-based services. This month it plans to roll out to its entire base a service called eIDS, for Integrated Dispute System, that already is in use by major acquiring partners Chase Merchant Services, Paymentech and Wells Fargo & Co. Some 15,000 merchant outlets were on eIDS in early March, but Everetts expects 95,000 to be using it by the end of the year.
  Immediate Reports
  The system allows merchants to scan cardholder receipts at their offices and then send them electronically to First Data, or they may fax them in and First Data will post them to the online site. Then, in the event of a dispute, they can pull up the needed receipt without resorting to paper, and get immediate reports of the status of the resolution effort.
  "Clients can see their work in queues, and also see their responses," says Everetts. "They'll be able to see what the status of the request is."
  Merchants already using the system are reporting 30% to 35% reductions in chargeback-related expenses, including labor and postage, according to Everetts.
  The eIDS service essentially is the merchant version of a new, automated chargeback-resolution system First Data simply calls IDS and developed in-house for its own use. IDS replaced two systems First Data acquired in 1995 when it gained ownership of two of the nation's three biggest merchant acquirers. One was the manual system of NaBanco, whose parent company, First Financial Management Corp., was acquired by First Data. The other was the more automated platform of Card Establishment Services (CES), whose technology was becoming outmoded about two years ago when First Data embarked on a big chargeback-processing upgrade, Everetts says.
  First Data also is looking to adapt its new chargeback system to the cardholder-issuing side of its processing business. One feature of the planned service, according to Everetts, will let issuers go onto a Web site and re-create the sales draft that the merchant has, saving time. A version that does not have the cardholder's signature is planned for roll-out this year; a version that includes the signature is planned but no release date is set yet.
  Global Payments also is moving its chargeback processing to the Web. A new system that will let merchants review stored sales drafts online is planned for release in Global's 2004 fiscal year that starts this June 1.
  "It is to our advantage ... to take people out of the process, and it makes us much more efficient," says Kelly.
  In order to use it, merchants first must fax receipts to Global or scan them into Global's system. Then, in a dispute, the copy that the merchant has can be compared quickly against the copy that Global received from the card issuer. The merchant also will be able to respond online. "You can take something that would take two or three weeks and limit it to a day or two," he says.
  The new service will build on the "Global Access Advantage" online statement service Global launched about 18 months ago that lets merchants review chargeback data but doesn't have an interactive component.
  Global is planning a marketing campaign to tell its merchants and partner independent sales organizations about the system, which doesn't yet have a name. Kelly, however, says it's likely to have the "Advantage" brand that Global uses for other services.
  Issuers also could use the Web more to reduce billing disputes. According to Wellesley, Mass.-based payment research firm Livermore Research, there are huge differences in the amount of detail issuers present in their online statements for cardholders. A recent Livermore study says that many issuers in their e-statements reported only four or five data items. American Express Co. reported the most, with nine.
  Of course, only a fraction of cardholders currently receive their statements online. But the number is sure to grow. The more detail available, the less likely it is that the customer will dispute a transaction because he does not recognize the company name, location or some other detail that's important to the transaction but easily forgotten by the customer.
  Some issuers are now showing expanded field values not found on paper statements. Citibank, according to Livermore, identifies at least 90 distinct merchant categories.
  That's the type of reporting that's possible with online statements. And while they are frequently at odds in the chargeback process, issuers and acquirers will agree that the more information everybody has, the less pain there is.