Can AI resolve credit card transaction disputes?

Aaron Lazor

Investigating claims of transaction errors or fraudulent activity is time consuming and expensive. Finscend, a 2020 ICBA ThinkTech accelerator participant, is applying artificial intelligence to the problem. Aaron Lazor, Finscend CEO and co-founder, explains. 

 

Give us a little history on credit card disputes and how they have evolved.

Aaron Lazor: The first credit card was introduced 70 years ago necessitating the dispute process. While carbon copy receipts are ancient history, dispute technology development hit a wall in the 1990s. As a result, banks now find it daunting to keep up with semi-annual changes in chargeback guidelines. Additionally, the constant rise in the number of disputes forces most banks to rely on third-party customer support because manual dispute processing is too expensive. When banks process disputes manually, employees spend an average of 180 minutes on each case.

How does AI approach the problem?

A.L.: According to the consulting group McKinsey, non-conformity, lack of automation and an unnecessarily high manual workflow leads to errors, delays and ultimately, lost revenue. Using AI ensures seamless, uniform application of current guidelines. For example, Finscend’s AI expedites by auto-decisioning four-out-of-five disputes within seconds and identifying invalid disputes at the onset. AI can slash the operating costs of banks while keeping dispute processing in-house to ensure greater compliance.

How much money is in dispute out there? 

A.L.: McKinsey estimates $6 trillion in transactions are processed annually worldwide. Disputed transactions have reached at least $40 billion. The top 15 U.S. banks alone spend $3 billion annually on inefficient, outdated dispute processing. That’s just the tip of the iceberg because of the e-commerce-driven rise in card-not-present transactions. 

In February 2019, the U.S. Department of Commerce announced the total market share of  “non-store” [card-not-present] retail sales had grown faster than in-store “general merchandise” for the first time ever. COVID-19 is accelerating the trend.

PaymentsJournal reports 30 percent of consumers have started using contactless payment methods (think NFC cards, smartphones, and wearables) since COVID-19 started. Furthermore, 70 percent of those who are new to contactless payments report they will continue to use this payment method after the pandemic concludes.

What can bankers do to educate their customers about avoiding being in this situation in the first place?

A.L.: While banks attempt to educate customers about vulnerabilities and people can easily find the right advice online, they often do not. Most people would not agree to attend seminars before getting their cards. Even educated cardholders can wind up disputing a transaction through no fault of their own. Merchants deliver the wrong product or nothing at all. Dishonest waiters steal card numbers. Hidden cameras and ultra-thin false keyboards on ATMs and gasoline pumps transmit card information to scammers using Bluetooth. The bottom line is there were disputes back when people paid by cash or check too, and the digital age won’t inherently make them go away.

What is something bankers miss about how these disputes are typically resolved?

A.L.: All bankers understand credit and debit card disputes negatively impact their bottom lines. Community bankers face fierce competition from big banks, making local clients their most valuable assets. As a result, the quality of client service is the community banker’s top priority. But what may not be so obvious is cardholder frustration with the pace and fairness of the dispute process, which often spurs them to switch to another bank’s card. By employing AI, community banks can reduce the risk of customer churn.

Can we expect there to ever be technology that makes disputes avoidable in the first place?

A.L.: Never say never when it comes to technology! Inevitably, human beings will always make mistakes and bad players will make unauthorized transactions using stolen card numbers. Scammers will charge cards for goods and services they cannot or will not supply as contracted. When mistakes happen and when fraud or scams occur, there needs to be a mechanism in place to allow cardholders to obtain chargebacks. Eight out of 10 cardholders prefer filing for a chargeback over attempting to resolve directly with the merchant. Technology may eventually automate the entire process but eliminating the need for it is a challenge AI cannot remedy in the immediate future.