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.