Online transaction disputes became both more frequent and more expensive in 2022, and merchants and ISOs have felt the impact. According to Sift’s Q4 2022 Trust & Safety Index, there were 35% more disputes in Q3 2022 than just a year and a half earlier, and the average value rose 16%, to $192.53, between 2021 and 2022. 

The trend towards elevated dispute risk is set to continue into 2023, with $100 billion likely to be lost to chargebacks. That’s bad news for the entire industry because disputes have a serious impact on payment processing. Not only does a lost dispute cost the merchant the revenue and inventory and the ISO its commission, but if the fraud-to-sales rate hits 1%, merchants go into fraud monitoring, potentially resulting in extra fees, extra work, and damaged relationships.

Luckily, there are steps ISOs and their merchants can take to reduce the number of disputes that come in, and win more of the ones they can’t avoid. Those steps, including clearer return policies, better dispute monitoring, and a more controlled response process, are the keys to not only staying ahead of rising dispute rates, but actually reducing losses in spite of them. 


Why Online Dispute Risk is Rising

The most likely explanation for more frequent disputes is the economic downturn the U.S. and many countries around the world are currently struggling with. Real wages – the measure of how much a person’s paycheck can actually buy – are plummeting. When money is tight, consumers are more likely to regret purchases or, in some cases, to get “creative” with the dispute process. In the first case, consumers who want to make a legitimate return but don’t feel it’s possible or practical may file a chargeback in good faith. But it’s the latter case, in which consumers intentionally abuse the dispute process to steal goods, that can really ramp up. Known as first-party fraud or “friendly fraud,” chargeback abuse is a big problem, and data from Sift indicates it’s likely a significant contributor to rising dispute rates. 

Sift found that, from January 2022 through September 2022, 71.5% of disputes were labeled fraud by the submitting party – an alarmingly high number. Far too high to jive with actual third-party fraud rates. That points to customers lying about purchases being made without their authorization in order to abuse the system. Further still, Sift found that 23% of disputes surveyed were willing to admit to participating in friendly fraud at some point. Considering the stigma associated with fraud, if 23% were willing to admit to engaging in it, it’s a safe bet the actual number is significantly higher. 

The concentration of rising risk on the web is even easier to explain: it’s just easier to commit friendly fraud with online purchases. Not only does it feel less personal since there was likely no human interaction involved in the purchase, but card-not-present transactions are easier to dispute as unauthorized and harder for merchants to defend. 


What ISOs Can Do to Mitigate Dispute Risk and Minimize Losses in 2023

Disputes don’t just impact merchants. When a chargeback is lost and the merchant loses the revenue from a sale, the ISO loses its commission. Too many merchants with high dispute rates can also cause problems for an ISO with its processing partners, and disputes are particularly problematic for wholesale ISOs responsible for underwriting the merchants they recruit. With all that in mind, there are steps ISOs can take to protect both themselves and their merchants from the risk associated with rising dispute rates. 

Ensure Merchant Return Policies are Reasonable, Accessible, and Clear

The simplest and most effective way to avoid disputes is to ensure consumers never need to file one legitimately. While it is highly susceptible to abuse, the chargeback process is designed to give consumers a way to defend themselves when merchants won’t honor reasonable returns or exchanges. For ISOs, ensuring merchants aren’t denying legitimate returns, and that their return policies are both reasonable, clear, and easy to find are important steps in the fight against disputes. That’s especially true for merchants who are trending towards that all-important 0.9% threshold. It’s possible that the issue lies in their return policies, and clarifying and improving them could alleviate the problem immediately.

Monitor Disputes More Closely

While chargebacks can be reduced, avoiding them altogether is impossible – especially considering that 60% of credit card disputes may be the result of friendly fraud. But a filed chargeback is not an automatic loss, and both merchants and ISOs have the ability to fight back by filing a response to the credit card company proving that the sale was legitimate. 

Unfortunately, the window for filing a defense is not long – often as little as 30 days from the initial filing. As a result, many merchants lose winnable disputes because they simply fail to respond in time, if at all. The most important step to bucking that trend is better monitoring. Not only do merchants need to know about every single chargeback, but they need to know about them as early as possible. The bad news is that if a merchant has to wait to find out about a chargeback from their acquiring bank, notification can take days or even longer – all while the clock is ticking. That makes it extremely important for ISOs to become more active partners in chargeback monitoring, ensuring merchants know about each dispute as close to “day zero” as possible. 

Understand Reason Codes Better and Respond More Accurately

Responding to disputes on time is a great start, but it isn’t enough. Plenty of disputes are still lost despite a timely response being filed because the evidence submitted is incorrect. The card companies like Visa and Mastercard won’t accept just anything as proof. They have clearly defined requirements for what they consider “compelling evidence” based on the reason code associated with the dispute. 

Highly defined guidelines should help merchants, but reason codes are an imperfect system. Merchants often misunderstand them, and, as already discussed, they can be abused by first-party fraudsters. In any case, to maximize the number of cases won and minimize the financial impact of fraudulent disputes – now $3.75 for every $1 of fraud – it’s important to ensure the merchant or ISO handling the dispute clearly understands what evidence is required. Visa’s new compelling evidence standard – CE 3.0 – aims to make it easier for merchants to dispute illegitimate chargebacks by inviting them to submit a wider variety of evidence, but the new requirements are still set in stone, and failing to meet them will still result in a loss. ISOs should ensure they have dispute resolution and reason code subject matter experts on staff or, better yet, trust the process to one of the modern dispute response tools available on the market today. 

Embrace Automated Dispute Reporting and Response Tools

If the problem with disputes is that they’re easy to miss and difficult to respond to, the natural solution is to let technology handle as much of the process as possible. Today, dispute reporting and response tools are available to help ISOs and merchants keep a closer tab on chargebacks, understand reason codes and evidence requirements better, and manage the response process as tightly as possible.

Tools  like IRIS CRM Dispute Responder constantly monitor for new chargebacks and send out immediate notifications to the ISO and merchant whenever one is detected. Faster, more consistent notification ensures chargebacks never slip through the cracks and merchants never lose a winnable dispute due to a lack of time. 

Automated dispute reporting tools also generally streamline the dispute response process by bringing it entirely online. A good dispute reporting tool will not only alert stakeholders of a chargeback, it’ll also clearly explain the reason code, lay out the types of compelling evidence required by the card company, and make it fast and easy to upload the necessary proof, submit the response, and monitor its progress. In essence, the goal of automated dispute response systems is to minimize the potential for human error as much as possible, ensuring more wins, especially in cases of friendly fraud.  

Empower Merchants to Act

ISOs should always monitor ongoing disputes and keep a close eye on each merchant’s history to help minimize the chances of getting caught up in fraud monitoring programs. But, ultimately, merchants need to be responsible for their own dispute management. The more an ISO can do to empower its merchants to help themselves when it comes to beating chargebacks, the better. Automated tools are ideal because they represent a low-friction, low-cost dispute management method that can often be extended to merchants. By providing merchants with the tools they need to succeed, the ISO’s role in the dispute management process becomes more about ongoing monitoring and quality assurance than about direct action. 


Managing Disputes with IRIS CRM Dispute Responder

IRIS CRM Dispute Responder is an advanced dispute reporting and management tool built directly into the payments industry’s leading customer relationship management platform. It provides ISOs and their merchants with a fast, effective solution to dispute management that saves time, maximizes the chances of winning, and minimizes losses due to first-party fraud. 

Dispute Responder offers ISOs:

  • Immediate “day zero” notifications by email and within the CRM as soon as a new dispute is filed.
  • Automatic follow-up reminders on day one and day three if no action has been taken. 
  • Detailed descriptions of each dispute including all the relevant information needed to file a winning response. 
  • An easy-to-use checklist outlining the response process and the exact compelling evidence required based on the dispute’s reason code. 
  • Fast, paperless electronic response directly through the CRM with no printing, faxing, or mailing required.
  • Complete, detailed reporting on ongoing and historical disputes.

And, because Dispute Responder’s notification and response features can be extended to merchants, the system represents a new value proposition and potentially even a new source of residuals for ISOs using IRIS CRM.

For more information on everything Dispute Responder can do for your ISO or PayFac, schedule a free guided demonstration of IRIS CRM now.