What chargeback changes can we expect in response to SCA?

We are well aware that the finance landscape is up to speed with Strong Customer Authentication (SCA) and its implementation. What is less known is how the new legislation is likely to impact chargebacks.

Sometimes it can be difficult to fully understand the chargeback system, but what is certain is that saying chargeback rates will be reduced in a post-SCA landscape is an oversimplification. Consequently, there are a few things that financial institutions (FIs), and the businesses they service, should know.

Don't expect a sudden reduction in chargebacks

While SCA will make certain reason codes for filing chargebacks redundant, that doesn't mean that these chargebacks will disappear. Ultimately, where one door closes another route will be found and with the majority of chargebacks (61 per cent in North America and 73 per cent in Europe) attributable to 'friendly fraud' (fraudulent disputes), we can expect the fraudulent chargebacks that were filed under these reason codes to be filed under different reasons.

So instead of anticipating a chargeback reduction, it will be beneficial for businesses to stay ahead of the game and be aware of changes in the way chargebacks are filed. Issuers? chargeback management systems should be kept up to date and they may have to rethink how they triage claims - especially when it comes to spotting 'friendly fraud'?. Maintaining open channels of communication with other members of the payments chain will be more important than ever.

Transaction Risk Analysis (TRA) and the liability shift

When SCA is implemented, the liability for certain chargebacks will move from merchants and acquirers to issuers. However, some merchants may want to shift the control of TRA over to their acquirers to give them greater jurisdiction over which transactions are challenged and which aren't. While this might seem like a bonus at first, it will also mean that they will be once again responsible for the chargebacks that issuers should be liable for under SCA.

Implementing 3D Secure 2.0 (3DS2)

Incorporating 3DS2 into merchants' payment processes can help alleviate any concerns surrounding friction during the checkout process, meaning that they shouldn't need acquirers to take control of TRA. Approximately 80 per cent of issuers plan to invest in machine-learning and rules-based engines to facilitate SCA processes by the end of 2021 and 3DS2 will help them apply TRA much more effectively.

If merchants leave the responsibility for TRA to issuers and incorporate 3DS2, it should mean that fewer payments are challenged, there is less friction during the checkout process and issuers will remain responsible for a good portion of a merchants' chargebacks.  

To learn more about what SCA will mean for your business, visit our new report on SCA implementation: Strong Customer Authentication: The State of SCA Adoption in 2021