A better solution to fraud and chargebacks than regulation

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The best way to handle payment disputes between cardholders and merchants is a controversial topic.

The issue is framed as a zero-sum contest where the needs of merchants must be weighed against the rights of cardholders. Conventional wisdom says that anything that benefits merchants must do so at the expense of cardholders, and vice versa.

Regulatory pressure from agencies such as the Consumer Financial Protection Bureau (CFPB) has largely ignored merchant views in favor of expanding cardholder protections. Unfortunately, this focus has consequences that continue to drive up costs for merchants and financial institutions caught in the crossfire.

Fortunately, technology gives us the ability to create a collaborative solution that benefits all parties without prioritizing the needs of one over the other.

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Clearly, there are good reasons to prioritize consumer protection.

When the CFPB was established in 2011, its explicit purpose was to protect consumers from abusive and predatory financial practices. This was seen as a necessary repercussion in a post-2008 environment.

Protecting consumers from fraud and abuse is the right thing to do. It also helps provide a strong foundation for the market as a whole. If consumers have confidence in their protection, they will be more likely to transact online.

Cardholders have the right to ask their issuing bank to intervene by filing a chargeback, essentially a forced refund. This fundamental guarantee underpins much of the growth of the online market over the past two decades. You could say that without it, far fewer people would shop online with confidence.

For cases of genuine fraud, payment disputes should be easy to resolve and require minimal effort from cardholders. Adding undue friction or burdensome barriers would have downstream consequences for the entire e-commerce industry.

The problem is that as cardholders have become familiar with the dispute process, they have learned to abuse the system.

The problem of chargeback abuse

Consumers increasingly view chargebacks as the first course of action when trying to resolve an issue with an online merchant. Card issuers have made it very easy to dispute a charge, to the point that it is often quicker for the consumer to contact their bank than to contact the merchant with whom they are unhappy. It's so easy, in fact, that many chargebacks are accidentally initiated by cardholders simply looking for information about a transaction.

This has led to a boom in friendly fraud, which costs merchants billions of dollars every year. A recent study found that friendly fraud was the most common fraudulent attack method for merchants in 2021, rising from fifth place in 2019.

The current system also places a heavy burden on merchants who wish to defend against friendly fraud. The lack of standardization...