How alternative payment methods can reduce chargebacks

There are many reasons to fear excessive chargebacks. Although the initiative provides great protection for buyers, payment managers know its potential for harm all too well. Not only can your company find itself charged higher rates by card schemes, but the expense of chargebacks themselves can wage war on your balance sheet. 

Chargebacks are not the enemy. But inefficient payment practices are. It’s always worth refreshing your perspective on how different payment methods offer more or less opportunity for chargebacks. And the extra security features of non-traditional payment methods, such as biometric authentication on mobile, can reduce fraud.

Strictly speaking, a “chargeback” is a specific legal concept relating to the rights of cardholders to avoid financial liability for wrongful payments, such as for goods or services not as described or fraudulent card use. A chargeback is defined as a payment that is billed back to the merchant after an initial transaction has been settled.

However, the term is often used in a broader sense to refer to returning customer funds. For the purposes of this article, we will use “chargeback” to mean funds deducted from the merchant as a result of a successful payment dispute.

Why it’s hard to win chargebacks with cards

Some managers assume that credit card processing is the best and only way to take payments for their business. And it’s certainly a great place to start; paying by card is familiar for many customers and reliable for many merchants. But it’s worth considering the tradeoffs and potential revenue risks that come with card payments.

When a buyer disputes a charge on their card – for instance, by claiming the payment was fraudulent – it’s raised directly with the issuer. The merchant is avoided entirely in the first instance, and signals a total loss of trust from the buyer. 

Who’s to say whether fraud (or friendly fraud, where the buyer has forgotten about their purchase) has taken place? The burden of proof is on the issuer, who has a vested interest in keeping their cardholder content. Unless there is an obvious paper trail such as a signature on a receipt or a record of magnetic stripe use, there may not be a simple route to calling the buyer’s bluff on chargeback fraud. Even more so in the case of a digital transaction such as an ecommerce purchase.

Variability in issuer responses to chargeback requests

Interestingly, there is considerable variability in how different issuers treat chargeback requests. Some issuers pass on payment disputes straight away, and seem to pay little to no attention to merchants’ representments. Unfortunately for merchants, this leads to low win rates – as low as <20% with some issuers. 

Often, the most appealing option for the issuer is to pass the dispute straight on to the acquirer. At that point, the acquirer simply receives a chargeback request without a reason to doubt its authenticity.

And if you’re lucky, as a merchant, you might get a chance to dispute it. It all depends on the payment method at play, as well as the responsiveness of your payments team to dispute events.

How can you avoid falling into the chargeback trap?

From our data, we find that around 70% of card payment disputes are rooted in fraud. This places a significant burden on merchants, who can be liable for the loss of funds. (Fortunately, Visa’s new Compelling Evidence 3.0 aims to support merchants in fighting fraud.) 

To really cut fraudulent payment disputes at the source, it could be worth offering certain alternative payment methods to your buyers. Not because APMs never support payment disputes – we’ve described some that do, below – but because of stronger authentication measures. 

A unique benefit of APMs versus traditional card payments is the additional authentication and security measures they typically offer. The reason for this is APMs often exist on mobile or wearable devices. This presents a double opportunity: to collect biometric authentication, and to exist only in one location (where the buyer is physically present). The physical interaction of the user with their device – such as tapping a smartwatch to a POS system or entering the passcode to unlock their smartphone – often eliminates the possibility of unauthorized account use.

This gives merchants the ability to evidence genuine payment intention, and can go a long way to reducing chargebacks. Thus, merchants can focus on genuine customer service and business fulfillment practices; for instance, checking that items are correctly described and dispatched. 

While card details and pin numbers are easy to repurpose from afar, biometric data are harder to steal. We’ll look at that in more detail in the next section.

APM benefits

Biometric data as a security layer in payments

• Globally, buyers will make $5.765 trillion worth of biometric payments annually by 2026
• The number of biometric payment users will top three billion by 2026

With analysts recording an explosion in the use of biometric payments, it is a highly relevant consideration for payment strategy planning. Technologists are working on ways to protect privacy and information security, even as demand for more secure payment methods grows. 

Mainstream bank card creators have been trialing fingerprint-activated payment cards, although these have yet to see widespread adoption. The technology showcased in 2020 by Visa, Natwest and others, uses a sensor built into a plastic payment card to read the cardholder’s fingerprint. This adds an extra layer of authentication as the sensor will not work with anyone else’s finger except the one it has been programmed to recognize.

And no, the sensor won’t work with a severed finger or a 3D-printed replica because the technology has safeguards built in. Such sensors respond only to a living human finger, responding to the heart beat and electrical pulses that flow through the body.

Other methods of biometric authentication used in payments include voice recognition and face scans. These are ideal for use in mobile payments, particularly given the extra security layer of needing to verify a payment using the physical device itself.

Smartphones as a gateway to stronger authentication

Given over half (54%) of the global population now owns a smartphone, it stands to reason that biometric authentication of mobile payments continues to proliferate. Smartphones often include built-in fingerprint sensors, and, of course, a microphone and front-facing camera to support biometric authentication. 

Such methods can reduce the likelihood of chargebacks against merchants, as biometrics are strong evidence that the user personally authenticated the payment. 

Research has found the security of mobile payments is a boon in developing countries where legal frameworks and enforcement mechanisms are less robust. Indeed, mobile payments are particularly popular in Asia. In many major Chinese cities, for instance, it is rare to carry plastic payment cards at all. 

In June 2023, Tencent-owned payment method WePay introduced the ability to pay by waving a hand over a sensor. The popular Chinese payment app uses “palm recognition” as an authentication option for users. It’s known as Palm Pay, and works by mapping the skin surface patterns as well as internal veins of the hand.

Although mobile payments offer benefits such as convenience and security, not all of them are immune from chargeback claims. In particular, payment managers need to pay close attention to the exact mechanism of certain alternative payment methods as some of them are pass-through digital wallets that rely on payment cards. And, of course, not all smartphone users choose to use biometric authentication even if their device supports it. 

Until biometric authentication is universally adopted, merchants can encourage buyers to use it as a convenient and secure option. In this way, merchants can use APMs like mobile payments as one of many ways to tackle chargebacks.

Which alternative payment methods support disputes?

When choosing the payment methods you want to make available to your buyers, you should be aware of how they differ in allowing customers to refute the validity of transactions. It is well worth referring to this cheatsheet if chargebacks pose a considerable risk to your business and you are considering which payment methods to offer.

Account to account payments (eg Bancontact, iDeal, EPS) – also known as bank transfer APMs, these are guaranteed payment methods, so transactions cannot be reversed. That means there is generally no dispute process.

ACH Direct Debit – supports chargebacks, although the merchant can present proof of authorization in the event of an ACH payment dispute. That said, not all issuing banks pass dispute cases to the acquiring bank. In Checkout.com's experience, only 20% of the dispute cases are passed back to us (as the acquirer). That means issuers can directly reverse the transactions and there's no way merchants can challenge it. In any case, merchants offering ACH Direct Debit must validate the buyer’s account as a regulatory requirement. Checkout.com (in collaboration with Plaid) offers a turnkey solution to verify buyer bank accounts, to reduce the likelihood of ACH chargebacks.

AliPay+ – supports a dispute process whereby a merchant can accept, challenge or ignore a chargeback notification. Merchants can submit evidence upon receiving a challenge, and the issuer or card scheme judges the claim.

Google Pay – end users can submit a dispute to their financial institution, and an enquiry often takes place before a chargeback is initiated. If the transaction was successfully authenticated, the merchant benefits from liability shift; in this case, Checkout.com’s in-house Dispute Resolution Team would represent the dispute on behalf of the merchant.

SEPA Direct Debit – buyers can request a chargeback within 8 weeks of the purchase date. The merchant cannot dispute this, so it is critical to only offer this payment method for subscription or digital services which can be revoked immediately.

‍WeChat Pay – supports a dispute process known as “Customer Complaints”. This means the buyer can ask the merchant for a refund through the payment platform. However, there is no chargeback provision, so the merchant decides whether or not to issue a refund in each case.

Strengthen your chargeback defense strategy with Checkout.com

As you can see from the above, chargebacks are not a clear-cut calculation for your business. There may be more or less chance of chargeback with certain methods, but nobody can say for certain how your customers will make use of these channels. It also cannot be guaranteed that your business would win or lose chargebacks, as the decision depends on multiple factors including the individual payment context.

If you would like to explore our solutions that help tackle chargebacks and lost revenue, feel free to get in touch with us.