How Blockchain can help reduce the credit/debit card chargeback for merchants
From time to time, nearly every one of us has experienced an erroneous or fraudulent charge on our credit card. After calling customer service or filing an online complaint, the credit/debit card company (also known as an issuer) initiates a process called a “chargeback”.
There are a number of different scenarios when a chargeback could occur:
- Customer disputes an unauthorized transaction with merchant
- Customer returned the product, but the credit was not posted to their account
- Customer did not receive the item which they paid for using the card
- Customer was charged twice due to technical issue
From a customer perspective, this may appear to be a very simple process – you make a complaint, then your money is credited back to your account. However, it’s a more complex process behind the scenes.
Chargebacks are initiated with the card issuer by the customer, after identifying a disputed transaction with a given merchant. If the chargeback request proves to be legitimate, the merchant’s bank refunds the entire amount. The entire process flow looks like this:
This chargeback process has several drawbacks. It is complicated, there is an additional cost to the issuer, merchants can potentially lose sales, and both merchants and issuers can suffer damage to their reputations.
However, blockchain technology gives us an opportunity to eliminate chargebacks by deploying the entire distributed payment network on blockchain, with the help of something called a “smart contract.”
If you’re not 100% clear on what blockchain is or does, I would recommend you pause at this point and read up on it.
Here’s how it would work:
- When the customer makes a purchase from a merchant, the transaction is registered in the shared ledger
- The transaction activates a smart contract involving the card issuer, merchant bank and the credit card network (i.e. Visa, Mastercard, Amex, etc.)
- Once the customer verifies the delivery, the payment is initiated from the card issuer to the merchant bank
The new, simpler, more secure process is depicted below.
This approach has several advantages over the current system:
- Because all participants are part of the shared ledger, transactions are created only after establishing a consensus from every participant
- Due to the nature of blockchain’s shared ledger, the chance of a duplicate charge is eliminated, so the customer cannot be charged twice
- Because multiple copies of the ledger are distributed throughout the network, payments are safer and more secure, because the network cannot be hacked to create an unauthorized transaction
- The “smart contract” can ensure that the customer is charged only after the product has been delivered
To learn more about blockchain’s potential and how we are using it to create improved security and trust, you can read more here.
Vidyashankar is a Senior Consultant at Atos|Syntel. He has over 8 years of consulting experience in the Capital Markets domain delivering strategy, roadmaps, business cases and business consulting.