What open loop closed loop chargeback services are available?
What is the difference between an open loop and closed-loop solution chargeback service?
A closed-loop solution stops the chargeback process (before it even begins) and gives merchants extra time to resolve the dispute directly with the consumer. This approach provides the greatest accuracy as well as actionable insights that help merchants minimize their losses and do what is in the best interests of their business.
Closed-loop processes integrate with top issuers offering near real-time insights. Direct integration with issuers also:
- Eliminates “race to the refund” – closed-loop solutions stop the chargeback dispute process, avoiding escalation in up to a 72-hour period. Merchant has ample time to determine the legitimacy of the transaction and decide how to resolve the dispute – by providing a refund, providing a credit, or taking no action and accepting the chargeback. In contrast, open-loop solutions do not stop the chargeback process and typically do not provide ample time to address the situation. The merchant must race to issue a refund to the consumer before the issuer processes the chargeback. In a worst case scenario, because the process is inefficient, the merchant may issue a refund on a transaction that becomes a chargeback anyway, resulting in additional chargeback fees and, potentially, a double refund. Unfortunately, some open-loop solutions have defect rates of 50% or more.
- Offers prompt notifications that help stop additional losses – merchants using a closed-loop service receive insight into the potential chargeback situation in near real-time helping to stop fulfillment of goods or services, preventing additional losses. On the other hand, open-loop solutions are hindered by communication delays, leaving only a 24-hour window in which merchants can respond. By that time, it’s usually too late to stop shipment of goods or stop fulfillment of services.
- Avoids false positives and lost profits – closed-loop solutions offer direct integration with top issuers meaning merchants can be sure that the notification they receive is a real, customer-initiated dispute and not a false positive (a dispute that is not going to become a chargeback). Unlike closed-loop solutions, open-loop solutions rely on a combination of data sources that do not come from direct integration with issuers. TC40 is a popular data source for these solution providers, despite it being a comprehensive fraud reporting resource rather than a chargeback tracking mechanism. The data in these reports is not targeted or can be aged by the time it reaches the merchant. This can result in paying for protection that was not effective, create expensive manual reviews and hurt the bottom line by over-refunding from false alerts
- Avoids defects, double-refunding and added chargeback penalties –data from a closed-loop service provider is directly sourced from the issuer in near real time when the dispute occurs, meaning there are not communication delays or timing issues that will result in defects. Open-loop solutions rely on several data sources that are often inaccurate or aged. This can result in defects for merchants. By the time the alert based on TC40 data, for example, reaches the merchant, a chargeback may already have been filed. This means the merchant still bears the cost of the chargeback fees and faces added losses due to double-refunding and/or lost product.
What is a closed-loop chargeback prevention process?
A closed-loop chargeback solution will activate the moment a customer files a dispute. The dispute is then routed directly from the issuer to the merchant for resolution and the chargeback process is paused for up to 72 hours – giving the merchant ample time to respond. This differs from open-loop processes, where the chargeback dispute process continues in tandem with the alert being filed.
Once the merchant is notified of the dispute in near real-time, they can resolve the issue directly with the customer and issue a refund or credit. Or, the retailer can choose to do nothing and let the chargeback proceed. If the issue is resolved, the credit will post to the cardholder’s statement and the merchant avoids the chargeback altogether, bypassing expensive fines, fees and penalties.
The merchant generally has up to 72 hours to respond, eliminating the “race to the refund” scenario that often results from open-loop workflows that usually give retailers only 24 hours to respond. Whether the merchant stops fulfillment of goods or services, provides a refund or takes no action and accepts the chargeback risk, he/she makes an active business decision.
Closed-loop services enable the merchant to bypass the communication delays and inaccurate data that are all too common within open-loop workflows. Without feedback loops and direct integration with issuers, open-loop processes push information to merchants in a fragmented way while forcing retailers to respond to situations within a shorter timeframe. Worse yet is that much of the data is TC40 data that includes untargeted information like first-time fraud offender reports. The combination of bad data, communication silos and rushed response leads to false defects that can increase the total cost of the service.
Can closed-loop chargeback solutions reduce time spent on manual reviews?
Chargeback solutions from a closed-loop solutions provider integrate with the issuers, which offers merchants accurate and timely chargeback indication information. Also, timely information directly from the issuer after a customer initiates the dispute, provides the merchant the time necessary to resolve the dispute with the customer in an expedited manner. A closed-loop chargeback solution greatly lowers false positives and substantially reduces the rate of unnecessary manual reviews. Eliminating the inefficiencies caused by unnecessary manual reviews allows more time to be spent on revenue producing activities or operational efforts that improve customer experience.
How are defects prevented by using a closed-loop solution?
Because data used by closed-loop solution providers come from integration with top issuers, the chargeback is stopped in near real-time and merchants have ample time to address the dispute directly with customers.
The closed-loop solutions provider passes data to merchants very quickly whenever a customer initiates a new dispute. Merchants have up to 72 hours to respond in a manner that fits within their policies and is best for their business. A merchant may choose to issue a credit, a refund or take no action at all and accept the chargeback, but the power of choice is in the merchant’s hands.
Closed-loop process solutions eliminates data transmission and communication delays, gives merchants an effective period of time in which to respond, prevents a “race to the refund” and eliminates defects – alerts that still turn into chargebacks.
Open-loop solutions not only do not stop chargebacks from occurring, the merchant often is acting based on inaccurate, non-direct and old data that ends up causing high defect and/or failure rates. Merchants’ expenses for an open-loop chargeback solution extends well beyond the cost of each alert as the percentage of faulty alerts, lost goods, chargeback fees, manual review costs all need to be totaled to arrive at the total cost.