Every business has customers, and every business that has customers wants to keep them. Businesses that don't have customers, it goes without saying, want some, so that they can get to work keeping them. In the retail trade the concepts of good service, customer loyalty and repeat business are part of the catechism; no new venture that ignores them will succeed, and no new venture is likely to be contemplated without taking the fundamentals into account: How do I attract customers? How do I give them good service so that they will come back? The recent past has been tough on retailers, and the causes are at least partially rooted in some fundamental changes that are making it harder to accomplish these twin goals of attracting and retaining new business.
Years ago, when working in a small East Coast fishing town, I patronized a little shop called Fairbank's Tackle. So did all the other fisherpersons (yes, there were females) in the town, since it was the only place we could get hot coffee, something resembling breakfast, rubber gloves and wool knit caps at 4 AM. You could get just about anything else you needed there and if you didn't want to pay for it until the crew shared out at the end of the week, Gary Sr. would put it on your account (unless you were a complete blow-through whom nobody knew). The little tackle shop had excellent brand recognition, a good base of repeat customers, a consumer credit program and did very well in its market.
Not so many years before that, if you were a consumer of goods and services you bought almost everything you needed from local merchants whom you recognized. You paid in cash or kind, or utilized credit granted on intimate local knowledge of you and your family. Today we find ourselves at the extreme opposite end of the scale, at the outer edges of a new retailing and payments universe and heading inbound at high velocity. There are fundamental changes shaping the new order: universality of access, channel migration and the maturing of the third-party payments industry. These forces are sculpting a world in which goods and services will be sold across multiple channels, to customers from virtually anywhere and from virtually anywhere. These goods will be delivered by third parties, in return for various third party forms of payment,
all facilitated to some extent by the large banks that are providing the funds networks. Understanding how these developments will change your business is one of the keys to attracting and retaining customers in the years to come.
Of the three fundamental changes noted above, two are already axiomatic among researchers and industry observers cataloguing the ways in which the world is changing. That access is becoming ever more universal has been clear since the advent of road building. It is also taken for granted that the Internet has changed everything. People can now find what they want, when they want, working from where they want, and have it all delivered the next day. Which people? All people. There is no demographic that you can safely assume will not be connected soon. This explosion in access has sharpened channel migration trends that have been evident for years, as people have selected from an ever-larger population of accessible providers. Does this mean that someday everyone will shop online and that there will no longer be a menswear shop on Main St.? That's not my area of expertise, but I would tend to doubt it.
Even if you run that strictly local shop and will never get a customer from the Web, or from the next county, chances are you still accept third-party payments. Virtually everyone does, in the form of credit and debit cards. This is another of the fundamental changes in our society that has made it tougher for retailers to control their customer relationships and provide the service component of a successful merchant enterprise. Billing and collecting payment have long been important parts of managing customers. To a great extent now, and increasingly in the future, those activities will be performed by large banks and other third-parties that provide payment instruments to your shoppers. Think PayPal, or even eBay, as well as Citibank and MBNA. If these networks were just about the transferring of funds from one place to another, their existence would have little impact on your concepts of service.
The bill and payment, however, have always been the leverage point in every customer relationship. If customers have a question, feel they have been shortchanged on value, or believe a mistake has been made, they often turn to the bill and expect to use payment as leverage for getting the situation rectified. Long ago the government began enacting rules that reflected this behavior, just as conventions solidified among retailers, and so today a payment that has already been
made can be demanded back, or one that is due can be withheld, for any number of reasons. When payment has been rendered with a credit or debit card, consumers expect to be able to turn to the bank that is billing them for relief. As I noted in the October '03 issue of Transaction World, the responsibility to provide relief is written into the Truth in Lending Act of 1968, as well as the Fair Credit Act, and other parts of the Code of Federal Regulations. When your customer calls the bank because of some issue regarding a transaction with you, the bank must try to resolve the problem.
As every card-accepting merchant knows, the most fundamental tools available to banks for the purpose of resolving transaction issues are chargebacks, and the associated processes such as receipt or documentation requests. If you are a typical merchant, your experience of a chargeback is something like this: you make a sale, you deliver the goods, maybe you split a shipment and bill accordingly, and you communicate with your customer with the best of intentions. The next thing you know there is a request from your Acquirer for sales documentation, accompanied by fees, or perhaps even a preemptive chargeback in which the sales funds are withdrawn from your merchant account, also accompanied by fees. You now have to prove that you did what you said you would do and hope to get the sales funds back (but not the fees).
In most cases all of this takes place without your once discussing the issue with your customer. In a large number of those cases, had you been able to discuss the issue with your customer, you could have prevented the chargeback from occurring in the first place. This is because a large majority of chargebacks are attributable to simple misunderstandings. In an astoundingly large number of these cases your customer simply doesn't remember doing business with you, doesn't recognize you from the description of your business on the credit card statement, or doesn't recall the terms under which you did business together.
So why not have that conversation, provide the necessary information and resolve the issue? Well, first, not every retailer wants to. In a study conducted earlier this year with Ogden Consultants we found a variety of attitudes among merchants. Large volume cost leaders, especially brick-n-mortar operations, tend to feel that by the time a question ends up at the card issuer's call center, there isn't much else they can do to satisfy the customer. Their systems are tuned to responding to chargebacks, not answering customer billing questions in realtime, and they have metabolized the associated costs. Smaller merchants, online merchants, merchants selling subscription services, and even large merchants who are service-focused, would generally like to
engage with their customer if it would help solve the problem. And there is plenty of data now indicating that it would help solve the problem and prevent a documentation request or preemptive chargeback from the bank. In the past though, there has been no efficient mechanism to encourage this discourse to happen.
Sometimes your customer doesn't want to talk to you. So-called "soft fraud," i.e. cardholders abusing the chargeback system to obtain "credit without merchandise return" is a component of the problem as well, albeit a smaller one. Whether your customer is calling the bank because it's the easiest thing to do, because they don't know how to contact you, or because they want to get their money back without contacting you, or returning your merchandise, the banks in past years have not recognized an incentive to try and change the customer's course. After all, they are the ones on the phone and resistance will only aggravate their customer, whom they have managed to acquire in a market that is likely more saturated and difficult to differentiate than yours, unless you sell napkins and only napkins. Any attempt to work through the issue with the customer will also cost time and money. Like some large retailers today,
their attitude was, and in some cases still is, "toss it into the system and let Visa and MasterCard work it out."
In recent years that attitude has begun to change dramatically among the most sophisticated credit card banks. The assumption that any attempt to actually arbitrate the problem would be more expensive than getting rid of it by the most direct method has come under assault by a new way of thinking, grounded in more accurate analyses of the costs incurred in processing a chargeback, and taking the associated hit to receivables. It is now indisputable, from a quantitative point of view, that a card bank can lower its costs by working with its cardholders to resolve a problem with a merchant, rather than simply charging back the transaction. We can further infer that each time a bank is successful in deferring a chargeback, they will also have lowered the merchant's, and the merchant's Acquirer's costs. The key to these benefits is resolution of the cardholder's inquiry at the first point-of-contact,
when they are on the phone with the card issuer, rather than after numerous and costly process steps. Current results indicate that in excess of 50 percent of all incoming transaction inquiries can be resolved at first point-of-contact, if sufficient information is available and the merchant will engage with the cardholder when called for.
All of this hints at a compelling new vision for retail customer service that we can think of as an "upstream service pipeline". This concept can perhaps be best illustrated by comparison to a common example: the downstream service pipeline that is already in place and improving customer service for many retail segments. Consider delivery logistics: a customer who has placed an order for an item can contact the merchant to find out if the item has shipped; if the item has shipped the merchant can easily access tools from the logistics supplier that will disclose the item's current status, location and expected delivery time. If the item has already been delivered, the logistics tools
will tell the merchant when it was delivered, by which driver and who signed for it. The evolution of these tools, which are typically web-based, has enabled the merchant, the customer, and the logistics supplier to track fulfillment of a transaction through every step, from inventory to obtaining the delivery signature.
Turn this picture around and focus on the payment end, and rather than the fulfillment end, of a transaction. Billing and payment are an area no less likely to generate consumer questions than fulfillment, and yet there is relatively little integration between the providers of payment instruments and funds networks, and the merchants who provide goods and services. We know of no merchant today who has in place any tool, web-based or otherwise, to enable a credit card bank to access transaction details, terms and conditions, return policies, or even an accurate description of the merchant's business. Instead, forward-thinking card banks are turning to public sources of information on the
Internet to attempt to identify a merchant, learn about the merchant's business and, in some cases, contact the merchant and attempt to resolve the customer's question. A more efficient and integrated upstream customer service pipeline will benefit all parties to a transaction, but there are both technological and cultural barriers to its evolution that must be overcome before these benefits can be realized.
The technological barriers stem primarily from those aspects of the payments system that are nothing at all like the slightly contrived example given earlier of a downstream pipeline. In the example a multitude of merchants and customers need to access only a few major providers of delivery logistics in order to determine shipment status. Tools provided by FedEx, UPS, DHL, Airborne, and a few other providers cover the bulk of the application space. In the payments network this relationship is reversed: a relatively small number of payments providers need access to details on literally millions of potential points-of-sale in order to more effectively deal with incoming inquiries from their customers. The large credit card networks that connect card issuers and merchants are structured in such a way that it is very difficult for issuing banks to
identify and communicate with merchants. Instead, these systems focus on message-oriented interbank communications between Issuers and Acquirers and both the message formats and information exchanged are insufficient to pursue the methods of dispute resolution described above.
Technology advances within these networks have been driven by the card associations and large banks on the issuing and acquiring side, and have focused primarily on streamlining the current processes and reducing paperwork. While these are beneficial improvements in and of themselves, the available dispute resolution mechanisms nonetheless retain most of the least desirable effects on both issuing banks and merchants, i.e. process and paperwork costs, as well as the impact on sales receipts and accounts receivable balances. Some improvement has been made to the leading causes of chargebacks by improving billing description clarity and embedding customer service numbers into repurposed transaction fields, but the vision of a service pipeline that allows banks and merchants to work together to resolve disputes at first point-of-contact is as yet remote.
The cultural issues orient primarily around the question of who has responsibility for servicing the credit customer. If you are a merchant, you may prefer that the bank deal with the costs of servicing "their" customer regardless of the fact that the caller is also your customer and is calling with a question about something you billed them for. If you are a credit bank, you may prefer to simply deflect the inquiry into the Visa/MasterCard dispute process, reasoning that you don't have any information on the merchant, their relationship with the caller, the fulfillment of the transaction, any terms and conditions, or other details that might satisfy the caller's demand. The constraints of the card
networks have led to somewhat entrenched adversarial attitudes on both sides. There is a perception among merchants that large credit card banks collude with the associations to make a profit from chargebacks, when in fact every card bank incurs large costs from these processes and would like to see them go away. On the other side card issuers are likely to consider poor merchant retail practices to blame for much of the problem, when in fact the vast majority of merchants simply can't do much to improve the situation working within the constraints of current transaction formats.
In order to overcome these issues and have a positive impact, any proposed combination of technologies and techniques will need to fit seamlessly within the current transaction model, address a large enough portion of the problem space, and not require changes in behavior by consumers or retail point-of-sale personnel. Most of the approaches now being tried fail one or more of these tests. Improved chargeback processes lower costs but do little to address the most painful effects of transaction reversals. Downstream delivery of imaged receipt signatures will have a very positive impact, but will not address the growing portion of Card Not Present transactions. Point-of-Sale authentication technologies like Verified by Visa and MasterCard Securecode
require retailers to enforce new consumer behaviors, a risk many have been unwilling to take. Online repositories of merchant information that can be used by banks for dispute resolution and to facilitate the appropriate interaction between cardholder, bank and merchant at first point-of-contact, hold promise but require wide adoption on the part of issuers and merchants to be successful. If adopted, such a solution would, like the downstream example previously discussed, pass the all-important tests of fitting within the current consumer behavior model and addressing a significant portion of the problem.
As with any problem driven by mass consumer behavior and labyrinthine regulations, both the sources and remedies of the chargeback issue in credit card operations are complex and subject to much analysis and debate. Much more is known now than was known five years ago about the reasons why customers call credit card banks to dispute a transaction and what kind of information exchange will facilitate resolving the issue. It is also clear that the combined effect of the Internet, mass communication and channel mobility are having exactly the effects on retail merchants and banks that were predicted a decade ago: customer relationships are growing more difficult to establish and good customer relationships more difficult to
maintain. Merchants must ask themselves: "Do I really want to defer the service opportunity represented by billing inquiries to large credit banks and assume that my customer will be satisfied with the results?" Improving the customer service pipeline so that card issuing banks and merchants are able to work together to service customers will improve costs and customer relationships for both parties and lead to improved bottom line results.