Theo Spyrides: Hello, and welcome to Payments Unfiltered, powered by Primer. I'm your host, Theo Spyrides, VP of Product at Primer. Okay, so Qi, thanks so much for joining us on Payments Unfiltered. I think as a starting point, it'd be great if you could maybe introduce yourself and maybe give us a 30-second version of what's Chargeblast and who it's built for?

QC: Sure, absolutely. Thanks for having me here, Theo. My name is Qi Cao. I'm one of the founders and CEO of Chargeblast. Chargeblast serves over 6,000 merchants globally and is one of the largest chargeback mitigation platforms globally. We don't only do chargeback prevention, helping merchants keep their chargeback rates near zero percent, but we also have one of the highest win rates when it comes to chargeback fighting, with around 65% win rates across the board. So, we're pretty proud of the growth we've seen over the last two and a half years since we were founded, and I'm excited to chat about chargebacks and merchants on this podcast.

TS: Awesome. Thanks so much for that introduction. Let's start at the beginning. What exactly is a chargeback? How does the process actually work from the moment a customer disputes a transaction, and when does the merchant feel the impact?

QC: Yeah, absolutely. So a chargeback is a way for a customer to basically dispute a transaction and have the ability to get their money back if a service was not provided to their standards, perhaps if a service was not provided at all, or in another case, there could be a stolen credit card that had been used and the customer wants to flag it to their bank.

So that effectively is a chargeback. When a customer files a chargeback, it's first filed with the issuer. The cardholder submits information as to why they deserve their money back from a merchant. The issuer processes that information and sends it through the networks. Ultimately, it'll reach the acquirer, which notifies the merchant that they have received a chargeback from one of their cardholders.

The negative impact of a chargeback is felt as soon as the merchant receives that notification from their processor. That means the processor has recorded that there has been a chargeback. That chargeback goes into their chargeback ratio, and if their chargeback ratio is too high, the merchant is at risk of losing their payment processing accounts.

TS: And are there any fees associated with a dispute or a chargeback?

QC: Yeah, I mean, fees really vary across the board. For example, Stripe is obviously one of the biggest processors out there. They have a $15 chargeback received fee, but they also have a $15 chargeback fighting fee. So if you decide to fight a chargeback, you have to pay an extra $15.

Now, payment processors write up these chargeback fees and make money off of them. Most payment processors are only fined around $5 per dispute received, and then the merchant has to pay anywhere between $15 to $25, sometimes $30, per dispute.

So it could be really impactful, especially if you're a lower AOV merchant selling a $9.99 subscription, for example.

TS: And so the business impact can be quite serious then, right? You have these fees that can be very expensive, especially if your average order value isn't super high. But also, if your dispute or chargeback rate gets too high, you can stop having the ability to process payments, right? So this is something that all merchants should be taking deeply seriously.

QC: Yes. Unfortunately, when we work with a lot of entrepreneurs and when they start their business, payments and payment risk are the last things they think about. That's why whenever I see and meet these entrepreneurs, I not only give them the solutions they need to reduce their chargeback rates, but I try to teach them, "Look, you can't just rely on one payment processor."

And that's kind of where Primer comes in. You can use Primer to orchestrate your transactions across payment processors. So you have that redundancy, you have that diversification, and you're not at risk of losing your ability to process payments overnight. I've seen a lot more merchants come in not knowing anything about payment risk. We try and teach them best practices, and Primer is actually a great example of that.

TS: Okay, so this is a serious problem merchants need to take seriously. What do I do as a merchant? What are the opportunities to build a strategy to deal with chargebacks?

QC: Yeah. You can look at it from multiple perspectives. You can look at it from a solutions perspective, and you can look at it from an operations perspective. I'll go with the solutions perspective first. The solutions to reduce your chargeback rates are chargeback alerts. You have RDR alerts, CDRN, and Ethoca alerts. Those are basically alerts where the merchant will be notified of the chargeback before the processor, and they can settle the dispute directly with the customer by refunding that customer. Settle the dispute right there. It’s not really a chargeback because it got settled within hours of the customer disputing. So that's one of the easiest ways to reduce your chargeback rate through a solution: chargeback alerts.

Now, with the increasing amount of friendly fraud that's out there, there's now a new solution called deflection, which we offer. Deflection allows you to fight friendly fraud. What's great about deflection is there's no refunding needed to prevent that chargeback. When there is a cardholder that disputes under the fraud code, we will actually send the IP address and transaction history to the issuer to show that it's friendly fraud. This card was issued basically near or on the IP address. There's a history of transactions between the cardholder and the merchant. Clearly, the cardholder has been using the services. It's not actual fraud, and therefore the cardholder shouldn't be allowed to dispute. So that's really powerful in the fight against friendly fraud. No refunds are needed from the merchant. Literally, it's just the issuer shutting down the cardholder from charging back because it's friendly fraud. Very powerful there.

So those are two ways of reducing your chargeback rates from a product perspective. Now, from an operational perspective, which I argue is actually more important for merchants to take into consideration because it's way cheaper to do, is reducing the time between the order and the delivery. You have a lot of dropshippers that have deliveries coming from China, which oftentimes get delayed, and then before you know it, you get a bunch of chargebacks under the code "product not received." Or if you don't have enough disclosures around recurring billing, you may have subscription cancellation chargeback reason codes, where the customer didn't realize they were going to get charged on a monthly basis for the product. So good disclosures, 24/7 customer service, and reducing fulfillment times are really critical to reducing chargebacks from an operations perspective.

TS: And from what you've seen, is there one that has the biggest impact versus the other, or is it all kind of a mix of doing everything you can possible to protect your business?

QC: It's doing the mix of things. It's doing best practice across the board because there are going to be times where your operational fixes are not actually going to prevent every single chargeback. That's where alerts come in and help prevent the remaining chargebacks that come in from bad customers.

You also have to consider that it's not only about reducing chargebacks. You could do operations-based chargeback reduction strategies. You could use solutions. But at the end of the day, you really want that diversification of processing. Because even if you do good operations, even if you leverage all the technological solutions out there, a lot of payment processors have risk modules or risk algorithms that are fully automated. So you'll get shut down. No human will be shutting you down. It'll just be an algorithm. I've seen merchants do best practices, leverage solutions, and then they still get shut down just because their MIDs, their processing accounts, are new, or they're processing in a geography that perhaps the payment processor is not too comfortable with. So having backups at the end of the day when it comes to payment processing is so incredibly important in this day and age.

TS: And so if we think about the tools I have to mitigate my chargeback risk that you just articulated, obviously the operational side makes a lot of sense. Probably even just improving it improves the user experience anyway. When I think about the ability to do auto refunds, when I think about deflection, do you see any nuance in region or even like MCC or industry type, or is the impact across the board?

QC: Yeah, great question, actually. It does differ by region, and this is where the nuances come in and a lot of questions come up from merchants like, "Hey, I got this chargeback. I thought you guys were supposed to cover it. Why did it get through?" Then you look at the transaction and the dispute, and it's from Mexico. Mexico has a very unique payments network where they take Visa transactions and Mastercard transactions, and they'll switch them onto their national network. So it's no longer on the Visa or Mastercard network as soon as it reaches Mexico. It's actually on the national network. Because it's on the national network and Chargeblast plugs into Visa and Mastercard, those disputes are actually not protected because Visa and Mastercard can't see, or don't have full visibility into, those transactions once they reach Mexico. So absolutely, there are limitations when it comes to alerts.

Another limitation is, even for RDR, which is fully automated, not every bank is integrated. RDR has 99% coverage, but it's not 100%. RDR is built on something called VROL, which is basically Visa's rails for Resolution Online. Not every issuing bank is actually integrated with VROL, surprisingly enough. I spoke with a large Japanese issuing bank, and they're like, "Yeah, we submit all disputes for Visa by hand, by PDF, or by fax." It's pretty insane because everything we experience in the US when it comes to chargeback coverage for RDR is like 99.9%. But as soon as you start acquiring transactions in other geographies, you see it drop off in interesting ways in different countries.

The last one I'd say is when it comes to Ethoca alerts, which are done through issuers, so issuers send those alerts. It's not done through the underlying Visa rails. That depends on whether the issuer actually signed up to be part of the Ethoca network. Not every single issuer is on that network. A lot of community banks that are smaller are not enrolled in the Ethoca network, so you won't get coverage on those. So you'll have little bits of slippage here and there. Overall coverage is very good, but there are nuances once you start processing in different geographies, taking on different types of issuers, and things of that nature.

TS: I'm not surprised to hear the regional nuances. It's always the case in payments. Payments are so complicated. I'd have to say, though, that fax was certainly something I didn't think was a technology that we'd be talking about today.

QC: So, pretty incredible. Yeah, so not everything is as integrated as you think in this technologically savvy world and time we're in.

TS: And there was a lot of noise created this year around VAMP. So I'd love for you to maybe, for those that don't know what VAMP is, explain what VAMP is, what happened, and ultimately what does it mean for merchants?

QC: So I think this is where a lot of folks will get a lot of value from this conversation: understanding VAMP. VAMP has now been announced for over a year, and people still don't really fully grasp what it means for their business and who's actually policing who.

Taking a step back, VAMP is the consolidation of two previous Visa programs: the Visa Dispute Monitoring Program, VDMP, and the Visa Fraud Monitoring Program, VFMP. Those are merchant-facing programs, meaning Visa would actually police the merchants. What Visa did with VAMP is combine it into something called the Visa Acquiring Monitoring Program. This includes not only disputes but also fraud.

In the eyes of Visa, a TC15 is a dispute. It's a chargeback. Someone's asking for their money back. A TC40 is a fraud warning, meaning somebody reported a card as stolen. Both of them matter. Alerts primarily cover only TC15. RDR will cover 99% of TC15s when it comes to prevention. TC40s are where it's tricky. TC40s can currently be prevented through deflection, but only a small sliver of them. Deflection includes a Visa feature called Compelling Evidence 3.0, or CE 3.0. Right now, CE 3.0 only covers fraud warnings that are associated with a dispute as well. So someone says, "Someone stole my credit card, I want the money back from this merchant." But it doesn't cover all fraud warnings that aren't associated with disputes, such as someone simply reporting their card as stolen.

However, very excitingly, just this month Visa announced an update to CE 3.0, which will now include non-dispute-related fraud warnings. So coverage goes from probably 10% of all fraud warnings to, if it's a qualified transaction, it should cover all types of fraud warnings. VAMP is where merchants are very concerned. They were always more concerned about TC40s than TC15s, but now there's a real solution with deflection against those TC40s.

One additional nuance that's important for merchants to understand is that, again, it is the Visa Acquiring Monitoring Program. It's not the Visa Merchant Monitoring Program. Visa is actually monitoring the acquirers, the payment processors. They're not looking at the individual merchants. It's the acquirers that are being policed by Visa, and then it's the acquirers that need to make sure their merchant portfolio is up to standard so they aren't getting fined by Visa themselves. A lot of European acquirers went down because of VAMP earlier this year. But all in all, I've seen a lot more merchants, actually higher-risk merchants, moving into lower-risk processors to take advantage of their overall lower-risk portfolio. The higher-risk processors used to acquire a lot of high-risk merchants, but because they did so, their VAMP ratios are through the roof. Now they have to cut merchants. So it's really interesting to see the dynamics happening right now with VAMP.

TS: And why do you think Visa made that change from monitoring merchants to acquirers? Do you have a view?

QC: Yeah, actually I was at a conference, and it's largely to reduce the amount of complexity for Visa when it came to monitoring. Instead of monitoring millions of merchants, you're just monitoring the acquirers. It simplifies things. It gives acquirers a little bit more decision-making as to what merchants to keep on or not. Some acquirers are very bold in the way that they'll eat the fees from Visa for VAMP and then just pass it on to their merchants. Even though the merchant is on VAMP, they don't have to shut them down. So it's really now up to the acquirers, and that simplifies things for Visa and allows a little bit more flexibility for acquirers to decide who to maintain.

TS: Okay, so if I'm a merchant that operates in a high-risk vertical, how should I be reasoning about this? Am I trying to navigate and de-risk my business?

QC: Yeah, what's crazy is I've actually been sending more merchants over to Stripe that are high risk. Stripe recently started acquiring more high-risk merchants. They got some more high-risk BINs, but they also have an overall much lower VAMP ratio across their whole portfolio. So Stripe is actually a really good place for a high-risk merchant to huddle in and enjoy the benefits of Stripe now that Stripe can basically dilute their VAMP ratios within the broader low-risk portfolio. A lot of that is happening right now.

TS: And so we've talked a lot around Visa's program. What about Mastercard's program?

QC: So Mastercard still has their excessive chargeback program and their excessive fraud program, so they're still separate. It's still merchant-focused. They actually just updated one of their protocols for acquirers to review more fraudulent merchants. If your authorization rates drop within 24 hours by more than 50%, that's something that's going to flag to the acquirer: you have to review this merchant because something is going on with their authorization rates. Or if two different issuers submit a certain fraud code for that merchant to the networks, then the acquirer needs to review that merchant. And the last one that's most frightening is for any merchants that have less than six months of Mastercard processing. If your chargeback rate and refund rate is above 5%, the acquirer has to review you as well. Mastercard is now, with this recent update, taking a more heavy approach toward merchants when it comes to forcing acquirers to review them. Because a 5% chargeback plus refund rate can be quite low for some merchants. Retail has an incredibly high refund rate. People buy clothing, try it out, and then send it back. It's like 10 to 15% refund rates. So the question is, how does this all work out in the long term? The older generation of merchants who have aged processing accounts are in a much better position than those just getting started because of the six-month rule. So yeah, it's really interesting to see how that plays out. I don't have a view on it just yet.

TS: It sounds like the schemes are also trying to put more onus on the acquirers to take a bit more of the operational load.

QC: Yeah. I mean, look, there are a lot of merchants to handle. If you think about it from a bureaucratic perspective, Visa and Mastercard just want to handle the acquirers. The acquirers handle the merchants. It’s much, much easier for the networks.

TS: So if I'm a merchant and I have all of these ratios to be monitoring, am I trying to get my ratio to zero? Is that the goal above all else? Or actually, is there some threshold where it's okay to have a dispute rate because the effort to get to 0% comes at maybe a cost elsewhere that isn't worth it?

QC: Yeah, I mean, it's a great question. Getting to zero is really not worth it. And if you're a merchant that wants me to get you to absolutely zero, it's not even feasible. Like I said, we don't have 100% coverage just because of some of the geographic or issuing network limitations there are. You want to keep your chargeback rates after alerts to around 0.5% or lower. There's no threshold, though, where it's like, "You are safe because you're under 0.5%." The reason why is because processors don't just look at chargeback rates. If they only looked at chargeback rates, it would be pretty easy to do risk mitigation. But they don't set a hard and fast rule like, "If you're above 1%, you're done." They look at it more holistically. Chargeback rate is one piece, but they also look at the reason you're getting these chargebacks. Is it because it's primarily subscription cancellation? Is it because it's primarily product not received?

I spoke with Shopify recently, and they gave me some really interesting insight. They said, "We're actually comfortable with somewhat elevated chargeback rates, but the customers need to be happy." Because they understand friendly fraud is a thing. It's a real thing. Around 70% of all chargebacks are friendly fraud. So they look at it holistically. They look at your Trustpilot reviews. They look at merchant reviews on Amazon. They look at their own Shop app reviews. They look at your website compliance. If you go on the merchant's website, does it immediately pre-check you as a subscription? And if it does, are the disclosures clear enough that it's a subscription? If not, you can have a 0% chargeback rate and they can still shut you down because you're not compliant with enough disclosures on your website, according to the FTC and things of that nature.

So yeah, there's no hard and fast rule. I wouldn't say go down to zero. It's not worth your time. Keep it to around 0.5%. That's probably the very safe place to be. But even if you're below 0.5%, you can still get shut down.

TS: Very good advice. I'd be amiss to not talk about agentic commerce and the impact it has on chargebacks. So obviously, AI agents are making purchases on behalf of consumers, or certainly people are trying to figure out how to make that a reality. From where you sit, has there been any impact you've seen so far on chargebacks, and what are you anticipating?

QC: No, no impact so far. I know from some conversations we've had with Visa, they are going to have basically a token or ID that will be able to identify when a purchase is made via an AI agent. That will allow us to differentiate between a human purchase and an AI agent purchase. I think that'll be really important, at least for chargeback fighting, because it's important to know: how much actual authorization did the agent have when it came to making a purchase on behalf of a person? So that's going to be really useful for chargeback fighting, I believe.

For chargeback prevention, what's probably going to end up happening is that any time there's a technology that reduces the friction to purchase, chargebacks usually increase. When you're checking out for a product that you wanted in the spur of the moment and it's a one-click checkout, then you regret it the next day, you're going to refund. But maybe if there were enough steps for you to actually think about your purchase, you wouldn't have made the purchase in the first place. So any time there is an easier or lower barrier to checkout or purchasing a product, chargebacks go up. My anticipation is that chargebacks will go up, and there will probably be even more need for merchants to leverage things like chargeback alerts.

TS: And obviously the schemes are trying to currently figure out these protocols, as are other companies like OpenAI and Google. It also feels like these protocols may have more information that might actually help prevent chargebacks or help manage the dispute journey. It feels like more information is a good thing in this space, right? So is there a case that actually this could be a great thing for chargebacks?

QC: It's going to be a great thing for merchants because merchants always want easier, more traffic, easier checkout. If we were to do the cost benefit, my guess is the cost benefit majorly benefits merchants from a revenue perspective more than the actual chargeback perspective. They may get more chargebacks, but I think they're going to get much more revenue. So if that were to happen and you get more legitimate revenue because of easier checkout, you could actually overall reduce your chargeback rates that way. Now, with what Visa is trying to do and what the networks are trying to do, you have this consistent catch-up. It's a constant game of: does regulation move fast enough to catch up to technology? Because technology is moving forward no matter what. And let's be honest, they're not waiting for regulation to come into fruition. Agentic purchasing is going to happen probably even before all the regulation and identification around agentic commerce. But once that regulation does catch up, yes, that information will allow us to better differentiate between human and agentic purchases, and then we can leverage that information for fighting chargebacks. Preventing chargebacks is always going to be tough to do. But when it comes to fighting chargebacks using more information, I think that'll be helpful.

TS: So short term, maybe not. Long term, maybe once everything's settled?

QC: Yeah, long term hopefully it's more clear, yes.

TS: Maybe one last question to you. So for any merchant watching this who's struggling with chargebacks or disputes right now, what's the one thing you'd tell them to do? Any final words?

QC: The thing that I would say is, if you have a fundamental chargeback rate issue, you can fix it using solutions like Chargeblast. But most of the time, you should really just take a step back and ask why. Why do I have a 3% chargeback rate? Why is it that three out of a hundred purchases get disputed? Is it because my checkout isn't clear enough? Is it because my subscription is too aggressive? Is it because my marketing is too aggressive? Because chargebacks are very expensive and the solutions are very expensive. Chargeblast is not a cheap solution. So my advice to any merchant listening to this is: if you have a chargeback rate issue, it's a fundamental business model issue. If you can keep your business running by fixing that fundamental business model issue, that's what you should do. Otherwise, if you can't fix it, then yes, you need to rely on Chargeblast. It's not going to be cheap, but if the business model allows for it, then that's all good and dandy. It's all a trade-off.

TS: Phenomenal advice and a great note to end on. Qi, thanks so much for your time. I really appreciate it.

QC: Yeah, thanks, Theo.