How can merchants maximize their chances of winning chargeback disputes with banks? How can they handle the psychological stress of getting hit with a major fraud attack?
Bradley Chalupski: Hey everyone. This is Bradley Chalupski, co-founder and editor-in-chief at MerchantFraudJournal.com. And this week, I’m going to be continuing my conversation with Pallavi Kuppa-Apte, COO at Chargehound. We got into some really interesting discussions about the psychological impact that fraud has on victims; how merchants have to handle that stress and cope with the fear that comes with selling online and what that can mean when you’re attacked by fraudsters. I think you’re going to love the episode. We really appreciate Pallavi coming out and having this conversation with me. And I hope you enjoy. And remember you can get all the latest tips and tricks at MerchantFraudJournal.com.
Pallavi Kuppa-Apte: There’s an interesting story that came up pretty recently where someone that we work with, they have very sophisticated fraud prevention measures in place, very cutting edge, and one of the things that they do is they have these micro-authorizations that they require someone to verify the amounts of these tiny deposits before they can complete the transaction to make sure that that person is who they say they are and they’re not a scammer. And so everything’s going fine, this is going on. This is a pretty common prevention technique. All of these payments are getting verified, they’re getting authorized. And then all of a sudden, four months later, they’re coming back as all of these fraud chargebacks, a ton of fraud chargebacks, millions of dollars with fraud chargebacks. And it makes no sense because they pass every check. And basically what they realized is that there was a breach on the side of the bank where these accounts were being breached. And the merchant never knew that, that information was never given to the merchant. And so they were continuing to utilize this fraud prevention measure that was not effective because of a breach that occurred within their own system. So, what are they supposed to do about it as merchant? And now all of these chargebacks are coming back as fraud to them. And they are on the hook for that revenue, that revenue has been pulled out of their bank account. And the thing is, that consumer was actually scammed, their account was breached, their credit card was stolen. So, they should get their money back. But should it be the merchant who is giving that money back when they were really in the dark here about what was happening? Or should there be some liability on the part of the banks?
B: So, that’s a really good segue to something that we put in the editorial, which was that the bank never pays. It seems like the bank never pays. And even in an example like this where the bank is the one that’s actually at fault. We’re not even talking about your traditional chargeback scenario. But you’re talking about a place where a bank had a breach in security that cost somebody millions and millions of dollars. And they’re just not liable. This law seems completely asinine to me. And I’m curious – even though this isn’t a fraud-specific question, I think it’s relevant to the conversation – why nobody has tried to push anyone to update these laws in any kind of systematic way? There are a lot more merchants than there are banks. And there’s also the possibility of class action lawsuits. And this is a problem that while not as well known as maybe our industry would like it to be, it’s certainly not unknown to any merchant, since pretty much all of them get something stolen from them at some point. So, I’m kind of surprised that nobody, either within the industry or outside the industry, from a merchant trade organization or advocacy group has pushed Congress to update these laws. I know that’s not really a maybe a question per se, but have you ever heard anything about that? Has there been any discussion at any level where people have said, “We should try to change this.”? Or is it just accepted that that’s what it is because that’s what it’s been since the ‘60s, and so you just got to make the best of it?
Pallavi Kuppa-Apte: It’s really interesting. I think what we can see, and something that surprised me as we built Chargehound was, you’re right, this is not an insignificant problem. So, basically, every merchant has this problem, so why isn’t there more urgency or more different types of action being taken? When we built Chargehound, chargebacks had been handled the same way for decades – it was just people manually compiling documents. And those documents may have moved, depending on your payment processor, from fax to PDF on an online portal. But it’s the same thing – you’re copying and pasting the thing. And that was really surprising to me because technology has advanced so much, the way that we transact has advanced so much, our payment methods have changed. But this problem is still stuck in this dark age or is still stuck in the nascent years of the internet. And I think that’s really interesting. And it didn’t make sense to me why, but then we got to know our merchants better as well. And I think it’s kind of psychological. It’s always been this kind of cockroach problem – it remains no matter what, you can’t prevent all of these chargebacks there. Before you could automate with Chargehound, there’s no good way to fight them, it’s expensive. No one likes doing it, no one likes picking up the phone or copying and pasting hundreds of PDFs – that sucks.
Pallavi Kuppa-Apte: We work with a lot of really amazing people on these teams that have been working with this problem for years. And they always say, “We’re like the janitor: no one notices or cares until the toilet is broken. But every single day that the toilet works, no one cares about what’s going on with it.” And I think that’s kind of an amazing analogy that our customers have given us, which is that they’re doing really important work and they’re given pretty arcane tools to do it with. But it’s really important, and it’s not until it breaks, that anyone else in the business really looks at it and says, “Wow! That’s on fire,” because the rest of the time it’s working well enough. And that’s how Chargehound came about is because we were like, “This should be automated. There should not be someone who is doing this copy and pasting. This shouldn’t be the use of their time and expertise. They should be empowered to think about these more strategic changes, these higher-level problems, these high impact projects; rather than spending all of their time mired in this chargeback process where that expertise can’t be used.
Pallavi Kuppa-Apte: You see all this stuff in the news, the cutting edge of payment technology, and it is evolving so fast. But then there are these little tangles inside that whole ecosystem that have been left in the dark that are waiting for technology adoption. And we saw chargebacks is one of those things for all of the reasons that we’ve talked about today. So, as technology adoption accelerates and we bring automation and efficiencies into these processes, it actually empowers merchants to have more leverage with the banks. Because you can imagine if you’re getting hundreds of thousands of chargebacks a month or a quarter, and you say, “I can actually fight all of these.” The chargeback process is not actually built for merchants to be able to represent all of their chargebacks.
B: And then it starts to cost the bank more money because they’re processing tons of these. And then all of a sudden, you have their attention.
Pallavi Kuppa-Apte: And I think it’s one small puzzle piece, but it is an important one. And at the same time, as you’re doing that, you’re recovering that revenue. We have merchants that are recovering 60%-70% of that revenue. So, now it’s both lessened the pain and provided more leverage.
B: So, has there really been no movement here, because I can see this as being actually a very rare cross-aisle issue because for your more traditionally liberal thinking, it’s going to be that you have these hard-working merchants, and they’re getting undermined by big corporate banks because they don’t have enough leverage. And on your more conservative side of thinking, this is clearly causing a ton of disruption to businesses around the country that are being forced to deal with this problem, and are losing money, and are just being put through hoops. We know it makes it a lot more difficult for small and medium-sized businesses. It’s one thing if you’re a large corporation, and this is, in some respects, written off as a cost of doing business. But if you’re a small or medium-sized merchant, and you’re losing 2% of your revenue, 2.5% of your revenue, or even 1% of your revenue, that’s money that you could be investing in your business to grow, that’s money you could be hiring people with, that’s infrastructure you could be building. There are tons of costs that are in here. So, I’m just really surprised that nobody has taken the initiative to approach this from a governance legislative level to say, “This is the same law for — we’re literally talking about 60 years at this point. Maybe it’s time for an update.” And it just surprises me that there doesn’t seem to be anything that any kind of trade association or business advocacy group has done. It seems like it would be something that if done properly with enough resources, you could probably get a little bit of leverage. But it sounds like you haven’t heard of anything like that.
Pallavi Kuppa-Apte: I think, mostly what we’ve seen is that it’s a problem that’s really been buried and kind of mired in this kind of like, “It’s a cost of doing business. It’s a lose-lose scenario.” I smell a new project for you, though. You might be leading the charge. I’ll tell you one more story. The reason we built Chargehound was because our founding team was actually a merchant ourselves. So, we were running a crowdfunding platform. And crowdfunding is very vulnerable to chargebacks, especially family fraud chargebacks. And we were getting our own chargebacks. And we went through this entire thought process that you’ve just outlined during this podcast, we went through that entire thing. We were like, “Wait a minute, why is our customer doing this to us? We did what we said we would.” And then we were like, “Wait a minute, why aren’t the banks listening to us when we said that?” And, “Wait a minute. You mean, also, there’s fees on top of this?” And, “Wait, you mean, every solution out there is manual or like a workflow tool and we have to spend time on this?” And then, again, like, “And it’s worth how much money?” And we went through that entire thing. And this law has been around for 60 years – this whole thing. And I like to think that we did take initiative because what we did was our CTO was so frustrated, he built Chargehound and he automated this problem, and it worked. So, then we were like, “You know what? Fine. You want to commit friendly fraud? Commit, do it. Banks, you want to give us that chargeback liability? Do it. We’re gonna automate all of this and we’re gonna win that money back.” Anyway, that’s the origin story of Chargehound. That was our response to this extremely frustrating and problems just full of friction to build a technology around it. So, I think that was our approach. And if I see you in DC lobbying for change and chargeback legislation, I’ll be happy to back you up.
B: Awesome. I will take you up on that offer someday, I hope. So, I want to close out with one curveball question here. I don’t know if you’ll even have an answer to it but I’m kind of compelled to ask. You mentioned psychology, and you’re obviously knee-deep with merchants that are going through this chargeback process. I’m interested if you’ve ever spoken to these people, these merchants, what their emotions are like. And if you’ve ever had someone break down either crying or cursing or both simultaneously. And what that’s like for you as well when you’re in the middle of this business problem that you’re trying to solve. But there’s obviously human element, and that’s something that’s sad but compelling about the entire fraud prevention ecosystem is it’s very easy to forget in the midst of technology and data and all this stuff that this is a human thing. You’re talking about people who have put their livelihoods – in the case of small to medium-sized businesses – on the line to build these things, and they’re getting stolen from. Like you mentioned, all of a sudden, you find you get a million dollars worth of chargebacks – whatever that number would be relative for other businesses, whether it’s $10,000, $50,000 – it’s emotionally exhausting and scary and frustrating. So, I’m interested to hear if you have any stories of talking to people about that. And also how you guys, as a team, are able to remain emotionally healthy when you’re around that all day and you’re seeing this happen to people all day and interacting with people to not just lose your mind or become completely depressed and go see if you can move to Antarctica somewhere and never see or hear from anyone ever again. Not that I’ve ever thought about doing that.
Pallavi Kuppa-Apte: I think in the last year, we’ve probably all thought about doing that. I think that’s a really interesting question. And I love that question. No one has asked me that before. 100% to the first part of that question: Yes, we have had such candid conversations with our customers who are incredibly smart and dedicated people at all kinds of merchant companies who have wealth of experience in fraud and disputes and just have such intricate knowledge. The emotions really run the gamut. There’s so much frustration of why am I mainly fighting my chargebacks when I feel like I have the expertise to make higher-level decisions about this? There’s the upset of “Why are my customers acting this way? We did what we said we were gonna do. Didn’t we build this great thing? Didn’t we sell this great thing? Why is someone doing this?” There’s that kind of dissonance. And we get it. We were there. Like I said, we were getting those chargebacks. We were a startup, so we knew. We were very close to each transaction. We knew who that customer was, and we knew what the thing that they were contributing to us. And it was that frustration and sadness about why people would do this, that was so motivating for us to be like, “There has to be a better way for companies to handle this situation.” Because part of the problem, too, is that when companies aren’t equipped to respond to their disputes at scale, it creates an opportunity for a consumer to go the route of chargeback and get the positive feedback of winning the chargeback when they know that it wasn’t a legitimate one. So, if you’re actually fighting those, we’ve had merchants tell us from fighting 100% of their chargebacks with us, their friendly fraud rates have actually come down because you don’t have those repeat offenders. People know that they can’t just do that, they need to actually go through the customer service and refund process that you’ve so thoughtfully put in place in order to come to a resolution.
Pallavi Kuppa-Apte: So, I think, absolutely, we have seen all of the reactions that you’ve described in our conversations with folks who are looking for a solution. And very rewarding, we’re in a place that’s super rewarding because what we get to say is, “Yes, let’s give you that opportunity to use that expertise to move to prevention initiatives, or move to these strategic projects that are going to make these really impactful differences in your organization and get you back to building something, get you back to feeling a meaningful contribution, get you away from those PDFs and the labyrinth of chargebacks. We’re going to automate that. We’re going to use technology to automate this rogue process. You’re going to get that money back.” So, family fraud has been committed against you, you’re going to recover that revenue, actually. And you are going to meaningfully and successfully address that problem. ‘Cause I think that’s what’s frustrating about chargebacks is, sometimes it feels like there’s nothing you can do. And that’s not true, you can fight these at scale and you can win them to the tune of very high-performance rates.
Pallavi Kuppa-Apte: So, I think, for us, it’s actually very rewarding because we have this problem, we have this frustration, we felt all of those things that you talked about. And then we built something that solved it, we feel. And now we get to go give that to other people who are feeling the same way. There’s nothing better than talking to someone who’s like, “Yep, here’s our problem. I want to adopt technology into this. What can I do?” And we got them set up with Chargehound. And a year later, they’re like, “Hey, I saved my company a million dollars.” That’s awesome. That’s great to go from PDFs day in, day out to saying, “Because I had the strategic foresight to look for a technology solution to this, I can now say, ‘I saved my company X amount of hours, X amount of dollars. And in the meantime, I worked on all of this other valuable stuff.’” So, I would say it’s pretty easy for us to stay motivated and healthy, at least when it comes to chargebacks because we feel like we have really built something that solves a problem for people who need it.
B: Well, I’ll let you sign off by telling everyone where they can find you guys on the web, and really appreciate you coming on the podcast.
Pallavi Kuppa-Apte: Likewise. Thank you so much. This was a super interesting conversation. And I hope that we get to have more. So, people can find us at www.chargehound.com. And they can shoot us an email at firstname.lastname@example.org. And we hope folks will reach out. We’re always happy to help. We’re happy to talk chargebacks and give our two cents. And thanks again. I look forward to more of these conversations. It’s been a great one
B: For sure. Really appreciate it.