Did you know banks still use fax machines? In this episode, Pallavi dives into the crazy (and frustrating) world of chargeback representment. How does chargeback representment work? How can merchants do more to win more disputes? Why are fax machines still a thing in 2021?
Listen to learn why there is hope for merchants to keep their revenue even after getting hit with a chargeback.
Bradley Chalupski: Hey everyone. This is Bradley Chalupski, co-founder and editor-in-chief at MerchantFraudJournal.com. And this week, we have part one of a two-part conversation that I had with Pallavi Kuppa-Apte, the COO at Chargehound. We had a great conversation diving into the ecosystem that merchants have to operate in when they’re trying to fight chargebacks with the banks. It was really enlightening to hear her perspective about the issues that are faced and the technology that banks are still using in the modern day to process chargebacks which really gives some insight into why it’s so difficult to win representing cases and what you can do to help. So, I hope you enjoy the podcast as always. Thanks so much for tuning in. And remember, you can always get the latest merchant fraud tips and tricks at MerchantFraudJournal.com. Enjoy.
Bradley Chalupski: Hi, Pallavi, and welcome to the podcast.
Pallavi Kuppa-Apte: Hi, Bradley. It’s nice to be here.
Bradley Chalupski: Thanks so much for joining us. We really appreciate you taking the time.
Pallavi Kuppa-Apte: No problem. I like your podcasts. I’ve listened to the last couple of episodes and there are some great stories on here.
Bradley Chalupski: Thanks, really appreciate it. We’re looking forward to adding some more. So, I’d like to let everyone get the good stuff up front. Tell us who you are, where you’re from, why you’re here. And then we’ll take it from there.
Pallavi Kuppa-Apte: So, my name is Pallavi Kuppa-Apte. I’m the COO of Chargehound. We’re based in the Bay Area. And we are the only fully automated chargeback solution in the market today. So, what that means is, I’m sure your audience is all too familiar with chargebacks and the representative process. But it can be an extremely costly and manual back-office process that really sucks up a lot of the time and expertise of super valuable fraud and chargeback analysts, and risk and payments teams at all kinds of merchants, especially those transacting online. So, what we do is we fully automate that process of representing them from end to end. So, from the moment you get a chargeback, we intake that, we append all of the compelling evidence into a beautiful document and we submit that automatically and instantly for every single dispute that you receive. So, we can fight up to 100% of any given business’s disputes. And we can fight over 250,000 chargebacks per minute. And so what that really enables merchants to do is; one, recover the maximum amount of revenue that they might otherwise be losing due to chargebacks, which can be a very significant amount of their revenue, anywhere from a quarter to an entire point of bottom-line revenue. And we enable them to do that without that suck of resources and massive opportunity costs that it would otherwise require to accomplish that. So, we try to turn with often seen as a cost of doing business or a lose-lose scenario into a real win-win scenario for merchants. So, that’s what we do.
Bradley Chalupski: Awesome. Well, thanks again for joining. So, we’ll just jump right in. And as loyal listeners know, I don’t hear these beforehand, so you get my genuine reaction to some of the craziness that goes on in our world. So, let’s hear your craziest fraud story.
Pallavi Kuppa-Apte: Yeah, I listened to a couple of your episodes and I thought about this one a lot, because we hear a lot of different stories from our merchants, and we love getting the behind-the-scenes scoop from them as well. And I think usually when we think about fraud and fraudsters, we’re thinking about these blackhat characters who are stealing credit cards, swapping faces, or doing these nefarious deeds on the dark web, and these credit card numbers, and all these things, Stealing identities. And this shows some amazing stories about these crazy crime rings and kind of fantastical schemes. And I think those stories are really fascinating because they are so crazy, like that’s not something that I would encounter in my day-to-day life as a consumer. At Chargehound, what we do is we focus on the chargeback side of things, which happens after the fraud has occurred, after these transactions have occurred, and now these transactions are being disputed. And what we’ve seen from many of our merchants is that, actually, a lot of them have very sophisticated fraud prevention solutions in place on that front end. They’re using an identity verification provider like SEON, who you talked to a few weeks ago. They’re using full-stack digital trust and safety solutions, and they have very smart people focusing on that problem.
Pallavi Kuppa-Apte: So, over 70% of their disputes sometimes are coming from friendly fraud. So, that’s what we spend a lot of our time thinking about at Chargehound and where our battle stories come from. And what’s really crazy to me about friendly fraud is how mundane it is. Friendly fraud is not someone surfing the dark web coming up with these entrepreneurial schemes to commit crimes. It’s so mundane, and it is so blatant, and it’s so widespread. So, I would love to find out if I did, but I don’t think I personally know anyone who’s committed acts of criminal credit card fraud, or identity fraud, or any of these things. I don’t think I know anyone who’s done that. But I know that I know, many, many people who have committed friendly fraud. Honestly, before we started Chargehound, I think I’ve committed friendly fraud. I’ve definitely bought something and the return policies have been really tough to navigate. And I’ve said, “You know what? I can’t get through with this merchant, I’m gonna dispute this on my credit card.” I remember the first I did that, it was in college. I couldn’t believe how easy it was. Most of the issuing banks do this with a click of a button. I don’t know if you’ve ever tried to file a chargeback dispute.
Bradley Chalupski: I have not personally.
Pallavi Kuppa-Apte: You’re probably in a minority because a lot of people I talked to – friends, family, Chargehound, people were like, “Oh, yeah, I do that all the time. Like I took an Uber and then it took too long, and their customer service chatbot is really annoying. So, I charged them back.”
Bradley Chalupski: So, I’m really interested on this point before we continue. When you’re talking to people and you’re hearing these kinds of stories, I assume that this gets factored into the way that you’re approaching this problem from a prevention standpoint. Or not even a prevention standpoint, because by the time it gets to your desk, the problem has already manifested. So, it’s really more of a resolution. When you’re trying to resolve this, how do you factor this kind of stuff in? What can you do to even discover this? Because I would think most people, when you contact them, aren’t gonna going to say, “Yeah, I really just didn’t feel like paying for this and didn’t feel like going through it, so I charged back.” Because that probably just sounds like it’s not going to hold water when you say that to someone. So, how does this kind of factor into your day-to-day resolution procedures?
Pallavi Kuppa-Apte: That’s a great question. You’re right that by the time something has become a dispute or a chargeback, that friendly fraud event has already taken place. It’s interesting what you’re saying about if you called someone up and you said, “Hey, what’s going on here?” They probably would charge back less because they wouldn’t want to get that phone call because those explanations don’t hold water. But the really insidious thing about friendly fraud is it looks just like a legitimate transaction on the front end, it doesn’t look like a fraud, there’s nothing wrong with it. Actually, as a merchant, you’re providing your product or your service just the way that you intel, and you’re getting a customer who’s legitimate and they’re using their own credit card, and they’re accepting your terms and conditions. And so by the time it’s a dispute, what you have to do is you have to submit all of this documentation around that transaction. And so you could call up the customer, you could try to, and let’s say they pick up – so, you’ve already gotten lucky – and you can say, “Hey, what’s going on here? We provide you with a refund, why are you also charging this back?” And they might say, “Oh, I’m so sorry, my mistake, I’ll try to take back that chargeback.” Once you hang up the phone, there’s no incentive for that person to do that. And you can’t really submit “Oh, I talked to someone and they said that they would retract us back to the bank,” because that doesn’t really count as compelling evidence, because it doesn’t prove that the product was delivered, or that the credit card was verified, or that the purchase was authorized. So, you really are in a rock and a hard place.
Pallavi Kuppa-Apte: So, to answer your question, what we do is if a chargeback is a case of friendly fraud, which it often is, we submit compelling evidence and documentation that shows that this was a legitimate transaction. Because the way to prove that something was family fraud is to prove that it wasn’t true fraud, that it wasn’t a merchant error. If a chargeback is coming in with a reason code like “The product was never received.” Well, a shipping tracking number, a shipping manifest signature, any proof of that product or service being received is going to show that that actually isn’t really a case of merchant liability. So, we take all of that into account in the documentation that we submit.
Bradley Chalupski: So, I want to go back to this confronting people because I’d imagine that for merchants, even sophisticated merchants, at large retailers, there’s some poor human being that’s getting tasked with calling people. Now, I’m genuinely a non-confrontational person but a lot of times I feel like I’m in the minority of human beings. So I feel like most people, though, aren’t going to enjoy making that phone call, even if it’s their job to go and do it. So, I’m curious what kind of stories you might have about calls gone wrong. Because I’d imagine some people are going to say, “Oh, I’m really sorry. I didn’t know. I didn’t realize. I’ll do it.” And they’re going to go on their way and do it or not do it. But I’d imagine that there are also people that use that door – having the retailer on the phone or a representative on the phone – to let them know what they think about why they need a chargeback, whether that’s poor customer service, the wrong thing, a damage thing, whatever possible thing that they might have. So, I’m curious if you have heard any stories like that, and how that factors in to how you’re going about gathering this information, and how you counsel merchants to go about gathering this kind of information for themselves?
Pallavi Kuppa-Apte: That’s definitely a kind of horrifying and also pretty funny to have these conversations. The truth is that most merchants will, you know, depending on what your business is, you might not have a way to contact that customer. I think one of the factors in this whole thing is that these transactions that were happening face-to-face are happening online, where remotely no one is present. And so there isn’t that face-to-face confrontation or interaction. So, I’m sure that there definitely are some businesses, probably smaller ones that collect the phone numbers and do try to call every customer that has filed a chargeback. We definitely have some merchants who do try to reach out to customers, especially if it’s a super high dollar value chargeback or whatever. Maybe not over the phone but maybe through a customer service chat. We’ve heard a lot of stories of these customer service chats where the the customer actually has reached out.
Pallavi Kuppa-Apte: So, we work with a lot of merchants in travel and entertainment. So, let’s say you booked a hotel room, you paid for it online with your credit card, you stayed there for three nights, and you signed the folio when you got to the hotel, and then you left. And a month later, two months later, the crazy thing about chargebacks is they can be disputed months after the transaction, so there are some good stories about that too. But a month later, you reach out to the customer service agent, you call the line or over chat, and you say, “Hey, I want a refund.” And are these chat transcripts of customer saying, “Hey, I want a refund.” Customer service agent going through the steps, “Okay, what happened? Why?” And they say, “Oh, I didn’t stay there. I didn’t stay in the hotel room.” And the customer service going in and saying, “Well, we see that you checked in, we see that your ID was scanned” – and hopefully they’re storing all this information – “We see that you signed the folio, the hotel verified that you came.” And the customer just say, “I didn’t come. I want a refund.” And then they’ll keep going and then the customer story will change. And they’ll say, “Oh, actually I did come but I didn’t like the room. The room wasn’t big enough. And so I want my money back because it wasn’t what I tried to book.” And the customer service is just like, “Okay, well, that doesn’t really qualify for a refund because you booked the room. You stayed in the room. You got the service. We provided our service exactly as described in our terms and conditions. This doesn’t qualify for a refund.” And you’ll see on the chat transcript then the customer will get to the point where they’ll say, “Well, I’m going to charge you back then.” And the customer service agent will be like, “Well, please don’t do that. But this doesn’t qualify for a refund, we can’t give you a refund.” And there’s countless of those chat transcripts where it just ends with like, “Alright, I’m going to file a chargeback.”
Bradley Chalupski: I want to follow up on that thread, before you go on, and ask you about the banks. And this is something that I really have always wanted to ask someone who specifically deals with the representant side of fraud. Because we recently published an editorial about Apple, and how they had basically gotten away with something that most merchants never would in a million years, which is basically got all their money back. I don’t remember all the exact details right now. But I know that this is a huge problem because, on the bank side, there are incentives. And I think not enough merchants really understand who’s incentivized in what ways in this process. I know you know but I’m just stating for the audience, the reason that the merchants are getting stranded or stiffed with the bag is because the customers, which are the credit card users, need the reassurance that if their card is legitimately stolen, they’re not going to have to pay for it because a lot of people would opt out of having a credit card even more now that we’re developing alternative digital forms of payment, it would be even worse than would have been even 5-10 years ago. So, the bank’s customer is not the merchant. Why? Because a merchant has to accept credit cards somewhere if they want to be in business. We have not moved far away enough from the credit card economy at this point, who knows what it’ll look like 10, 20, whatever years down the road. But as of today, there is no alternative. You cannot have a viable business for 95% of your everyday merchants if you’re not accepting credit cards. So, the bank knows that you are going to take this service. And so they don’t really have an incentive because they, as a group, are not liable for the fraud. So, they say, “Well, we need people to take it out, and we know the merchants are going to use the credit card companies anyway.” And so it’s the merchants that ended up holding the bag. So, I don’t think enough merchants really understand how that works. And I’m curious what your experiences have been if these kinds of things come up where you say to the bank, there should be some movement here to try and prevent obvious, repetitive, friendly fraud where you’re cutting off a credit card user because it’s 5, 10, 20 times that you’re seeing friendly fraud occur on their account even though it’s not harming the bank. I’m interested to hear as much as you’re willing to share about that ecosystem with the banks.
Pallavi Kuppa-Apte: I love that you brought that up. I think you hit a lot of points on the head there that really make up the backdrop of this ecosystem like you describe it that set merchants up in a lot of ways to be in this really tough position. So, I think you’re exactly right. I agree with everything that you just said. I think there’s a couple of things here that I want to call out. So, one is exactly what you said. Depending on the merchant, a merchant like Apple is going to have much more leverage with the banks than a smaller merchant. And when we see that because we service merchants up and down the spectrum in terms of their size and their transaction rates. So, we see the different treatment or the different ways that merchants are not able to have leverage with the banks and how that affects things. There are conversations with the bank that you are able to get and have as a much larger global enterprise than the mom-and-pop shop transacting much smaller volumes. So, the rules are not the same for everyone. And I think that’s a great point. And I think it’s very smart for these really large motions to make use of that leverage because all they’re doing is trying to even their playing field.
Bradley Chalupski: Because nobody wants to lose Apple as a customer. But your mom-and-pop shop – they just don’t have the leverage.
Pallavi Kuppa-Apte: And it’s smart of Apple to say, “Hey, we have some leverage here, too,” because that’s honestly very rare for merchants in this payment ecosystem to have that kind of leverage. So, I think that’s the right thing to do. I think that for the banks… I don’t think I really have to hedge too much here, I want to be candid. They have a business to run too. Their customers are the credit card holders are the consumers and chargebacks were invented as a customer a consumer protection measure in the ‘60s when everything was happening face to face, online commerce was not even a glimmer in our eye. And those rules have largely stayed the same as everything has come online. And a lot of these issuers and acquirers are massive of institutions with a lot of legacy infrastructure, a lot of legacy processes. And you could go down, there’s just a huge rabbit hole into how all of that works. So, they are also it trying to evolve with the times. And online and digital payments are accelerating at such a massive pace that we’re seeing a lot of this stuff lag. And not to go off on too many tangents, but that’s how you see payment processors really serving as wrappers on top of that to make these infrastructures more accessible for merchants. So, to put technology on top of a lot of this legacy infrastructure to make some of these things more accessible for merchants: your Stripes, your checkouts, your Braintrees. But at the root of that, there are all of these legacy processes. And what we’ve seen is even at the issuers, the people are reviewing the chargebacks. I like what you said, “If someone has committed a bunch of friendly fraud, there should be a repercussion.” But a lot of times at the issuers themselves, there’s not necessarily technology or automation there to make those processes easier. So, you’ve got chargeback analysts on that end reviewing, oftentimes, these documents that are faxed to them, if you can imagine. And there are these massive queues of disputes. And so the merchants are getting their disputes, and they’re scrambling to be able to find those disputes. But merchants can adopt technology like Chargehound and they can automate all of those disputes and fight all of them in an instant. But then those are going to be sent back to the banks. There isn’t, yet, a Chargehound for banks.
Bradley Chalupski: So, isn’t that exactly the point though that this is still going through fax? I promise you, I am confident – having never worked in a bank ever – that there is no other function of a modern bank that is using a fax machine. And that just shows you how little importance and emphasis is placed on this problem, which is exactly the point.
Pallavi Kuppa-Apte: I agree. You’re right. At the end of the day, if a merchant doesn’t find a way to fight their chargebacks, then they’re going to lose a significant amount of revenue. If a bank doesn’t find a way to more efficiently handle those chargebacks, they’re not on the hook for anything because they’re not liable to the merchant.
Bradley Chalupski: Thanks for checking out the podcast, everyone. Hope you enjoyed part one of this conversation. Next week, we’ll be releasing part two, and we’ll look forward to seeing you there. Take care.