The Merchant Advisory Group Responds to the Kansas City Federal Reserve Releases Report – “Chargebacks: Another Payment Card Acceptance Cost for Merchants”

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The Merchant Advisory Group responds to the Kansas City Federal Reserve report titled, “Chargebacks: Another payment card acceptance cost for merchants.” The report fills an important gap in existing research and information about the US payment card chargeback system.

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“It should come as no surprise that merchants are anxious to move away from the antiquated signature-based credit and debit card environment that perpetuates the arcane chargeback process,” commented Mark Horwedel, CEO, Merchant Advisory Group.

The Merchant Advisory Group responds to the Kansas City Federal Reserve report titled, “Chargebacks: Another payment card acceptance cost for merchants.” The report fills an important gap in existing research and information about the U.S. payment card chargeback system.

“The Kansas City Federal Reserve report is a great step toward increasing transparency around the payment card chargeback landscape in the United States,” commented Merchant Advisory Group CEO Mark Horwedel. “Improved chargeback transparency has become even more critical for the merchant community with the recent October 1, 2015 payment card fraud liability shift associated with the deployment of EMV chip cards in the United States that will likely leave merchants, particularly small ones, covering an even greater share of card fraud losses.”

The report notes that almost all fraud losses are borne by either the merchant or issuer. The report found merchant losses from chargebacks is about 5 basis points of sales value. The report also found that once the chargeback process was initiated, merchants only won the dispute about 20 to 30 percent of the time leaving them bearing the majority of chargeback fraud losses (both in number and value) instead of the issuer.

“Payment card chargeback-related losses are a very meaningful component of card acceptance costs for merchants,” noted Horwedel. “As the report indicates, there are several other merchant costs associated with chargebacks in addition to lost funds. The merchant not only allocates labor and capital resources to prevent, detect, and resolve chargebacks, but they may also pay fees and fines to their processors or networks. Not to mention, the merchant ends up out the merchandise purchased by the fraudster.”

“It should come as no surprise that merchants are anxious to move away from the antiquated signature-based credit and debit card environment that perpetuates the arcane chargeback process,” commented Horwedel. “Authenticating the cardholder at the point-of-sale with more sophisticated and reliable tools than easily-forged signatures would help eliminate payment card fraud and put an end to these antiquated chargeback procedures.”

“There is no place in commerce where the necessity of system reforms is more evident than for Internet e-commerce sales and other card-not-present transactions, including some mobile payments,” noted Horwedel. “Merchants pay some of the most expensive rates on e-commerce transactions, and yet despite their own investments and innovation to help better prevent against fraudulent e-commerce transactions and enable a safer more secure shopping environment for their customers, merchants are primarily left footing the bill for the e-commerce-related card fraud in the system. With e-commerce as one of the fastest growing types of U.S. transactions, it is critical that the U.S. move toward a more balanced system to foster growth and innovation to better protect merchants and consumers from payment card fraud losses online.”

The report found that “Chargeback and merchant loss rates in the CNP environment are higher than those in the CP environment. The differences are remarkable for four-party schemes. In the CP environment, the chargeback rate is less than 1 basis point in number and about 3 bps in value. In contrast, in the CNP environment, the chargeback rate is about 30 bps in number and 38 bps in value.”

Payment card chargebacks are a process whereby payment to a merchant for goods or services can be reversed. As the report explains, “When consumers make purchases with a credit, debit, or prepaid card at merchants, the merchants typically receive funds of those payment card transactions a few days after the transaction date. However, even after merchants received the funds, those funds are not necessarily guaranteed for the merchants due to chargebacks. Chargebacks are full reversal of transactions by card issuers.”

Chargebacks are a product of signature credit and debit card environments. The chargeback process is governed by the global payment card brands, such as Visa and MasterCard, who have hundreds of pages of network rules detailing how the chargeback process works. As the study notes, PIN debit card transactions are excluded from the study because “PIN debit networks typically do not have a chargeback process.”

According to the payments trade publication Nilson Report, the US accounts for 48.2 percent of gross card fraud losses worldwide while generating only 21.4 percent of total global purchase and cash volume. In 2014, US fraud reached 12.75 cents per $100, while fraud losses in all other regions combined was 3.73 cents.

About the Merchant Advisory Group
The Merchant Advisory Group (MAG) was founded in 2008 by a small visionary group of merchants in the payments field dedicated to driving positive change in payments through multi-stakeholder collaboration. Today, the MAG represents over 100 of the largest U.S. merchants who account for nearly $2.6 Trillion in annual sales at over 430,000 locations across the U.S. and online. Roughly $1.5 Trillion of those sales are electronic representing over 41 Billion card payments. MAG members employ nearly 11.5 million associates.

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