Mobile Payments & Chargebacks

 
In the far future, when the history of consumer payment methods is written, credit cards may be little more than a fleeting diversion between the long reign of cash and the eventual rise of electronic payments. We may still be in the era of the credit card for now, but electronic mobile payments keep gaining ground rapidly, especially outside of the United States.

This quick and widespread adoption has helped to empower consumers and created many opportunities for merchants, but when it comes to implementing new payment technologies, nobody ever wants to wait until a fair and consistent framework for handling transaction disputes has been hammered out. While mobile payments are showing consumers how they can live in a world without plastic payment cards, it’s still the old bank chargeback process that consumers fall back on when a dispute arises.

Chargebacks are rising at a higher rate as people warm to app-based and mobile payments, using them for online payments, in-store pick-up purchases, and to pay individual service providers. Lacking the rules, familiarity, and payment protection technology that has built up around card payments over the years, app and mobile payments have much higher chargeback rates than traditional payments. As more and more merchants and businesses begin accepting these payments, the market becomes progressively more vulnerable to chargebacks.

Why Mobile Payments Attract Chargebacks

Mobile payments are premised on the idea that simple and streamlined is better, so if a customer wants to make a purchase—either remotely or at the point of sale—they should be able to do so with a device that they’ve already got in hand, rather than having to refer to or scan a single-purpose payment card that stays buried in your purse or wallet whenever you’re not making a payment.

There are universal payment apps like Apple Pay and Google Pay that draw money from your existing payment cards or bank accounts, and proprietary apps for businesses like Starbucks that function more like electronic gift cards that you “load up” with funds from another payment source. Either way, you make your payment by scanning or sending an electronic communication from your smartphone or other mobile device, the app exchanges information with the point of sale system, and the payment is made.

Of course, this seamless, touchless method of making a payment opens the door to a wide range of claims about not intending to make a payment, not recognizing a payment, forgetting with funding source was linked to which app, and so on. The less effort you have to expend to make a payment, the less likely you’re going to remember it later. Chargebacks flourish under conditions like these, where the technology is novel and unfamiliar to consumers and there’s no history of regulatory precedent for the financial institutions to draw upon to decisively and equitably resolve dispute claims.

Mobile Payments Are Here to Stay

While it remains uncertain how the future of mobile payments will unfold, don’t count on this being a passing fad that eventually yields back to good old plastic. A recent report by Grand View Research projects that the global digital payments market will exceed $132 billion in the next five years, based on an annual compound growth rate of nearly 18%. Big corporations in the United States and China are pushing hard to expand the reach of mobile payments, and consumers who have grown increasingly accustomed to managing their lives from their smartphones are getting on board.

Consumers and merchants alike want seamless, immediate transactions, and in terms of protection against true fraud, cloud-processed mobile payments offer many advantages over transactions authenticated on premises with reproducible payment credentials. Electronic mobile payments can also offer lower transaction costs and other benefits to small business owners.

While the Asia-Pacific market may be the epicenter of the mobile payments boom, late adopters in the west are starting to come around to the idea of convenient mobile payment platforms. Four out of ten smartphone owners make use of some sort of payment app, and younger consumers are leading the charge—between the ages of 18 to 34, that rate approaches nearly seven in ten. The tipping point for mobile payments ubiquity may not have arrived yet, but when you look at the demographics, you can clearly see it coming.

Conclusion: How to prevent mobile chargebacks

As the adoption of mobile payment systems increases, it will become even more important for merchants to have strong policies, procedures, and strategies in place to prevent and fight chargebacks. Not only will consumers continue to question and dispute charges for the same reasons they always have, but just as artifacts of the credit card payments process can lead to cardholder confusion and chargebacks, so too will mobile payment technologies create as-yet-unseen conditions that lead to disputes.

Eventually, the banks and tech companies that oversee these platforms may hand down rules and frameworks for dealing with chargebacks in the mobile payments space, just as Visa and Mastercard do with their yearly mandates, but that will happen as part of a long, ongoing process, and in the meantime the liability and labor of dealing with mobile payment chargebacks will fall upon merchants.

The good news is that many methods of self-defense against chargebacks are universal, regardless of the payment methodologies involved:

• Top-notch customer service that assures your customers that they don’t need to complain to their bank and wait for a chargeback to get their problems resolved (or, if need be, their money back)
• Concise, clearly explained terms and conditions that let customers know exactly what they can expect from your products and/or services
• Truthful marketing and advertising copy that does not make promises to the customer that you cannot actually fulfill
• Fast, reliable delivery with real time tracking

Additionally, merchants who are beginning to accept mobile payments should meticulously document these transactions and practice good recordkeeping in the event that a dispute arises. Simplified mobile payments may leave less of a paper trail than transactions that march their way through a POS system, a payment processor, and an acquiring bank, but if you end up having to fight an unwarranted chargeback, you’ll want to have as much documentary evidence about the transaction as possible.

We expect mobile payments are here to stay, and the interrelation between these new payment platforms and the existing chargeback process will continue to evolve. In the meantime, merchants should stay informed and make sure they’re following best practices for chargeback prevention, because the external protections just aren’t here yet.

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