Dispute Resolution Strategies for the Modern World
Updates beyond CE3.0 and First-Party Trust are needed to match how consumers shop today
Despite significant technological progress, the essence of dispute resolution remains anchored in two fundamental principles from my perspective: ensuring customer satisfaction, and upholding fairness for all parties involved.
Safeguarding consumer rights and improving their journey when those rights are challenged, all the while protecting businesses from exploitation, forms the cornerstone of my vision for the future of dispute resolution.
For nearly a decade, I’ve championed the cause to influence updates in card network rules, advocating for regulations that mirror how people shop today and their ubiquitous digital presence. This advocacy is critical in addressing and challenging the rising threat of first-party fraud.
Recent findings from Sift’s consumer survey highlight the urgency of this issue, revealing that 42% of Gen Z individuals admit they might engage in friendly fraud.
Chargeflow’s analysis of their data shows a staggering 79% of chargebacks — that’s 8 out of every 10 cases — are actually friendly fraud. And an even more staggering quote in this Visa blog article saying that first party fraud and first party misuse is costing the industry approximately 25 billion a year.
To put that into context, that’s 7X of the loss reported from known victims of pig butchering scams! This data underscores the critical need for regulatory changes to combat these trends effectively.
Visa’s CE 3.0 is a step in the right direction, signaling a gradual but impactful shift in addressing these challenges. Same goes for Mastercard’s First-Party Trust Program.
Visa CE3.0 marks its first year, and Mastercard First-Party Trust has begun its rollout in 2024. Despite the evolution of ecommerce, starting in 1980s and gaining popularity in the 1990s, network updates to address first party fraud are nearly three decades behind the curve. So there’s still a lot more to do.
The Evolution of Dispute Resolution
Remember the time we used paper maps and actually asked for directions? Seems like forever ago, now that we’re so used to simply typing a destination into our phones and getting turn-by-turn instructions in real-time.
That’s pretty much how big the change has been in the way companies handle card payment disputes.
I’ve worked in fraud and disputes in fintech, ecommerce and gaming for over 15 years now, as the issuer, acquirer, and merchant, and I’ve seen up close how the process for handling card payment disputes has totally changed.
The shift from manual, paper-heavy processes to sleek, automated, and AI-integrated systems is a story of technological triumph and is proof to the relentless pursuit of making things better and easier for customers, and getting things done more efficiently than ever before.
Back when I started working in dispute resolution, processes were manual, time-consuming, barely anything made sense, and often left both customers and businesses super frustrated.
The issue isn’t just about how long everything took. On the merchant side, resolving a dispute is a laborious task involving extensive investigation, evidence gathering, and packaging everything convincingly enough to persuade banks to side with them over their own customers (the cardholders).
This often results in a prolonged waiting period, leaving businesses in suspense for weeks or even months before learning whether their efforts to reverse a dispute is successful. Not to mention the financial implications of funds being in limbo during a dispute, affecting cash flow and reconciliation processes.
Customers (cardholders) face their own set of frustrations. The lengthy dispute resolution process meant that even though they received provisional credits for disputed transactions under Regulation E for Electronic Fund Transfers (EFT), or were exempted from payment obligations or interest charges under Regulation Z for credit accounts, they risk being rebilled if the merchant successfully contests the dispute.
This back and forth of responses and funds adds to the overall confusion.
“Risk of insult” also plays a critical role here. Imagine a merchant that fights every single dispute, driven either by an ill-advised quest for justice or a misinterpretation of the dispute rules, making things worse for real victims of fraud.
If one of these victims, who has been a loyal customer, finds their legitimate dispute challenged, do businesses truly believe they can retain the loyalty of such customers? It’s crucial to think about how this affects keeping customers and the costs involved in acquiring new ones.
The big puzzle is figuring out who should bear the burden in cases of legitimate fraud (hint: it shouldn’t be the person whose card was used without authorization).
This is up for debate and will vary depending on who you’re speaking to, but issuers and merchants seem to be passing the buck (note that issuers must adhere to fraud protection requirements as mandated by Regulation E (Reg E) and Regulation Z (Reg Z), in addition to complying with the specific rules set by card networks).
And then, there’s the question of preventing the same thing from happening again, which means improving methods of spotting and stopping fraud before it even gets a chance to go through.
In my experience across various roles, fraud prevention strategies and deep-dives into data to strengthen defenses are top priorities, ensuring fewer fraudulent transactions occur from the outset.
Despite these proactive measures, reactive cycles persist due to fraud attacks, risk-overlooked product launches, or data breaches, ultimately encumbering dispute teams with the aftermath.
It’s important to note that in tech companies, dispute teams handle both fraud and consumer disputes. Therefore, their focus should be on managing only legitimate disputes, i.e., disputes that banks should not have filed in the first place (no chargeback rights) or cases of dispute abuse.
But primarily, businesses should strive to prevent problems before they occur. This means ensuring their fraud defenses are robust (listen to your fraud teams!), maintaining high quality products and services, communicating clearly with customers, and providing timely support when issues arise, laying the groundwork for a smoother dispute resolution process.
Let me tell you about my time in Malta, working for a sportsbook/casino company. It feels like ages ago now but I wouldn't mind going back, because…hello, Mediterranean!
My job as a Risk Analyst had me going through piles and piles of dispute paperwork, flipping through each page by hand — a practice that feels almost alien in today’s digital-first world.
Back then, we'd get notified about chargebacks through regular mail. Fortunately, we didn't have social media platforms where people can share the latest dance moves while casually dropping tutorials on disputing payments.
The process of receiving these chargeback notifications by mail, entering them into our system, and then starting the actual work of reviewing and contesting disputes was incredibly time-consuming.
This administrative burden often distracted from the true purpose of resolving disputes efficiently.
Side note: It was during this time that I got to see the effectiveness of Visa’s 3D Secure (3DS) system in fraud prevention. The adoption of 3DS guaranteed winning disputes over claims of unauthorized payment, because issuers do not have the dispute rights to file them in the first place.
This was more than a decade ago and it’s intriguing to note the slow adoption rate of such technologies in the U.S. (aside from the obvious reason and often assumed customer friction), despite their clear benefits, reflecting a broader pattern of uneven technological uptake and regulatory adaptation across regions.
It’s a topic worth exploring further and a conversation for another day.
But going through that grind taught me a lot about how clunky and slow things were, and seeing what a difference security protocols like 3DS could make. These insights were invaluable for me, providing me with a holistic perspective and profoundly influenced how I develop dispute resolution strategies for companies today.