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June 06, 2023

Automating payment disputes: 3 key considerations

Before digitizing the dispute process, banks must factor in their own risk tolerance and the customer experience.

According to recent research, an estimated 4.4 billion global consumers will shop with a digital wallet this year. And that’s just the beginning; according to Nilson, network payment cards will generate 891.2 billion transactions in 2027, an increase of 42% over 2022’s figures.

With contactless payments becoming the norm, the overwhelming majority of these transactions occur smoothly, with speed, convenience and security. But explosive growth has brought a commensurate increase in disputes in which cardholders claim a transaction registered to their account is invalid. These disputes are not insignificant; according to estimates, e-commerce losses to online payment fraud topped $41 billion globally last year.

For customers, initiating a dispute is a stressful experience. They must analyze their bank statements, find information on how to raise a dispute online, and contact their bank either in person, online, or over the phone. And several lengthy conversations with the card issuer may be necessary before the bank has all the information needed to process the claim.

At the same time, the cost and complexity of dispute settlement continue to be major sources of frustration for banks looking to improve their profitability and retain customers. The pandemic, in particular, brought to light a distinct lack of operational flexibility. During the early phase of lockdowns, consumers initiated a wave of travel disputes due to cancellations—and banks were unable to smoothly manage the spike.

While customer service has long been a priority for banks, particularly across digital channels, the process of disputing transactions remains tense, complex and time-consuming. Current efforts focus too heavily on internal processes without considering the effect on customer experience (CX) and risk.

To better manage growing dispute volumes, banks are increasingly adopting digitization and automation to streamline and manage costs in the dispute domain, with the goal of enhancing CX. But as financial institutions move down this path, they must be wary of introducing unnecessary risks that counteract the benefits of digitization.

In working with many of the world’s top financial institutions, we’ve identified three key areas in which banks must shift their focus to ensure successful implementation of digital dispute processes.

1.    Understand automation’s impact on CX and operations

To ensure excellent CX when disputes are automated, banks must consider multiple factors. First, they need to build an omni-channel experience for customers. Those customers should be able to address the dispute process online (including mobile devices) and via the telephone. All channels should provide a uniform user experience and should speak to each other—a customer must be able to start a dispute in one channel and pick it up in another.

It's also vital that banks understanding the agent experience when building out their digital dispute process. A strong agent experience will focus on:

  • A unified platform that allows for end-to-end processing (as opposed to agents being forced to access information in multiple systems).

  • A guided process flow in which system prompts direct the agent to the next step in the investigation and resolution of the dispute.

  • Data quality checks that ensure adherence to association guidelines before submitting dispute information for resolution.

  • Alerts and dashboards that ensure adherence to compliance dates.

Finally, banks must develop a comprehensive change management plan. Financial institutions often underestimate the degree of change management required for effective rollout of a digital disputes solution. Although such systems simplify agents' work, agents must acknowledge that they will relinquish control to the system, which will direct their actions. To ensure a smooth rollout, it’s essential to create a comprehensive change management plan that includes training and metrics.

2.    Tech considerations for an integrated dispute management strategy

Taking into account the following technology considerations will ensure a smoother implementation:

  • Choose a third-party out-of-the-box solution. We strongly recommend this approach, as opposed to developing a fully customized solution from scratch. A third-party solution, customized as needed, will reduce the association and regulatory compliance burden on the bank by providing ongoing updates as inevitable changes occur.

  • Financial and operational reporting automation. Banks should strongly consider automating these processes to reduce errors and improve operational efficiency.

  • Phased implementation. Banks should adopt a phased approach to implementation by automating simpler reason codes first, and by using analytical feedback to determine next-best candidates.
3.    Align on risk, compliance and controls

In setting up a digital dispute process, banks must align on their risk appetite upfront, as this will impact the use cases for automation and overall benefits. This can be achieved by aligning risk parameters with given fraud or operational loss targets, then monitoring performance against the threshold.

If that desired threshold is exceeded, the bank needs to understand how to throttle digitization use cases to stay within risk constraints.

A bank’s risk appetite will impact two areas. The first is solution simplicity. Customers prefer a seamless process when filing disputes through a digital channel, but a simplified process can encourage “casual disputers,” individuals who may file a dispute without giving it much scrutiny because the ease of doing so. Casual disputers can potentially overwhelm downstream dispute processing and increase write-offs from low-dollar disputes.

A bank can reduce its volume of casual disputers and reduce friendly fraud risks by embedding additional friction in the process. For example, it can limit channels available for the process, excluding mobile.

A bank might also implement controls to assess dispute validity. For example, time frame-based controls understand the context of the transaction, such as whether the time frame for a dispute has passed, or if the expected delivery date for goods has not yet arrived. And then there are merchant-based controls; customers disputing Amazon transactions can be directed to check their order history prior to filing a dispute.

The second area impacted by risk appetite is speed of digitization. If there is a lower appetite for risk, the bank will phase in implementation of reason codes at a much slower pace by gathering analytical feedback before implementing the next reason code.

Banks are grappling with escalating dispute volumes due to changing customer needs. As they move toward increased digitization, careful consideration is needed to not only develop a best-in-class customer journey, but also to ensure the right guardrails are implemented to ensure regulatory compliance and prevent unnecessary increases in dispute servicing costs that counteract the benefits of automation and digitization. This digital shift will not only enable banks to lower the cost of servicing disputes but maintain customer trust.

To learn more, visit the Consulting section of our website or contact us.

This article was written by Eeshan Paranjape and Bruce Sawyer, Consultants in Cognizant’s Banking & Financial Services Consulting practice, Sayan Ghatak, Principal Architect in Cognizant’s Enterprise Platform Services-Digital practice, and Ramona Balaratnam, Thought Leadership Strategist.

Cognizant Insights Team

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