Voice of the Industry

What is the relationship between chargebacks and SCA? It's complicated

Friday 19 March 2021 08:23 CET | Editor: Alex Guzu | Voice of the industry

Tracy Cray and Craig McClure from Fi911 share their insights into the state of chargebacks after the implementation of PSD2, detailing the changes brought about by SCA in a Q&A session

We may all be well versed on what Strong Customer Authentication (SCA) means for our industry, but still a question mark remains over chargebacks. It may be surprising to hear, but it is not as simple as to say that chargeback rates will reduce in this post-SCA landscape. To guide us through the complexities, here is what Craig McClure (CM), Director, Relationship Management, and Tracy Cray (TC), Director of Card Scheme Compliance, had to say:

First and foremost, do you think that there will be a reduction in chargebacks in a post-SCA payments industry?

CM: The chargeback system can be a complicated beast, especially when predicting how new regulations will impact its functioning. While merchants and financial institutions (FIs) alike get up to speed with SCA requirements and what it means for them, we don’t necessarily anticipate seeing a reduction in chargebacks. Moreover, the way FIs experience chargebacks being instigated may well change. This is because SCA will make some of the reasons for filing a chargeback redundant, but that does not mean a customer won’t still proceed with a claim.

As we know, the majority of chargebacks (61% in North America and 73% in Europe) are the result of friendly fraud. While those instigating fraudulent chargebacks won’t be able to convincingly claim that they didn’t authorise the payment, as they have had to give one of the three SCA layers of authentication, they may start looking to other reason codes to file a chargeback.

Ultimately, where one door closes another route will be found. For example, we saw this happen when Visa Claims Resolution (VCR) was implemented in 2018 and the ‘unrecognised transaction’ reason code was removed, and a lot of these chargebacks migrated to fraud reasons.

Will merchants be protected even if Transaction Risk Analysis (TRA) is implemented?

TC: Not necessarily, it depends on a merchant’s SCA exemption strategy. While the implementation of SCA will see the liability for a chargeback shift from the acquirer to the issuer, some merchants may look to apply TRA via their acquirers. This is because it gives them greater control over which transactions are challenged by SCA and which are not.

When merchants choose to do this, however, liability for the transaction will be reversed to what it was prior to SCA and they will be liable for chargeback claims. If the merchant does choose to avail of exemptions, they will have to resolve chargebacks – whether they are genuine or cases of friendly fraud.

How can issuers and acquirers respond to changing chargebacks liabilities?

TC: First and foremost, acquirers must ensure that their merchants have integrated the 3-D Secure 2 (3DS2) standard into their business structures. Roughly 80% of issuers plan to invest in machine learning and rule-based engines to facilitate SCA processes by the end of 2021, and 3DS2 will help issuers apply TRA much more effectively. This will mean that less payments are challenged, there is less friction during the checkout process, less cart abandonment, and the liability for transactions and chargebacks lies with the issuer still.

CM: When it comes to issuers, our advice is that your chargeback management systems should be kept up to date. In addition, communication with the entire payments channel is imperative. Remember, we may see reasons that customers are instigating chargebacks starting to change, so rethinking how you triage claims is advised – especially when it comes to spotting friendly fraud disguised as goods or services disputes.

If either acquirers or issuers are struggling with handling chargebacks, or they feel there is a communication breakdown somewhere in the payments chain, they should seek the help of a third-party provider. These companies are conveniently placed between acquirers, issuers, and merchants, making chargeback management much more fluid and efficient.

Overall, what are your thoughts on SCA?

CM: Like with any new regulation that comes into force, we do expect some hiccups along the way. That’s not to say that SCA is not brilliant in terms of fraud prevention – because it is! We can expect fraud levels to drop, which will help businesses handle chargebacks associated with criminal fraud much more easily.

TC: My advice to merchants is this: incorporating 3DS2 into your payment process can help alleviate any concerns surrounding friction during the checkout process.

For issuers and acquirers, alike, I stress that education is hugely important. It’s up to acquirers to ensure that merchants know what is required of them when it comes to SCA and if issuers educate consumers on the damaging effects of chargebacks, it might just help reduce the number of claims that they are newly liable for.

What’s more, teaching consumers about SCA requirements will help reduce cart abandonment for merchants, as they will know what to expect during the payment process. Issuers can highlight to customers the changes coming into effect, why their payments may be challenged, and what authentication they are required to provide.

Now is the time for a consolidated effort from all players throughout the payments industry when it comes to the successful implementation of SCA. If we collaborate with those around us, there is no need for the regulation to impact companies negatively.

For more on the steps financial institutions can take to ensure efficacy of SCA, download Fi911’s latest report: Strong Customer Authentication: The State of SCA Adoption in 2021.

View more on Fi911 and its chargeback management services for financial institutions at: https://fi911.com/.

About Tracy Cray

Tracy Cray has over 35 years’ experience in the credit, prepaid, and debit card payments industry, specialising in chargebacks and Section 75 of the Consumer Credit Act 1974 at the Royal Bank of Scotland (RBS) before joining Chargebacks911 and Fi911 as Director of Card Scheme Compliance. Tracy leads the team to provide expert advice and assistance to issuers, acquirers, and merchants in their chargeback handling. Tracy also chairs a number of chargeback and scheme forums.

About Craig McClure

Craig McClure equips clients with the regulatory knowledge and skills needed to reduce chargebacks. As a Relationship Manager with 10+ years’ experience at issuing banks and card schemes – including Visa, Lloyds Banking Group, and HBOS – McClure aims to eliminate the disconnect between merchants and banks that hinders the fight against payments disputes.

About Fi911

Fi911 supports financial institutions with innovative back-office management technologies created specifically for the banking and payments industries. By offering direct communications between FIs and their ecosystems, the company’s scalable payment product suite offers features that range from fast, flexible merchant onboarding to highly transparent, feature rich client portals and dispute processing. Established by the dispute experts at Chargebacks911, Fi911 offers global reach and expertise, as well as customised training and support from recognised industry leaders.

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Categories: Fraud & Financial Crime
Countries: Europe
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Fraud & Financial Crime

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