6 strategies to improve Reg E error resolution
By Loraine DeBonis, Marketing & Communications Director
The regulators are watching. Fraudsters are active. Consumers are calling.
What’s a financial institution or prepaid program manager to do?
When dealing with dispute and chargeback management, financial institutions and prepaid program managers (providers) often struggle with competing priorities: compliance, protecting against losses from fraudulent claims, and providing cardholders with a great customer experience.
I recently sat down with Ben Jackson, the chief operating officer of the Network Branded Prepaid Card Association (NBPCA) to discuss Regulation E error resolution in more detail and offer some best practices for balancing those priorities. Although our discussion focused primarily on prepaid cards, many of the same keys to success apply to traditional debit products, as well. Below are some important takeaways from our discussion, which is available on the Power of Prepaid podcast series.
Why It’s Hard to Get Right
Regulators have made it clear through supervisory highlights (PDF) and enforcement actions that Reg E compliance is a priority for them.
Why is it so hard to get right?
Reg E error resolution includes a complex maze of requirements with many moving parts—from different dispute types and different time frames that kick in for multiple actions, such as providing provisional credit and sending letters, to the overall resolution time frame requirements.
For example, if the cardholder provides written notification of the dispute, you’re required to issue provisional credit within 10 business days for established accounts. Provisional credit is the credit given to cardholders to cover the disputed amount while you investigate the claim. If it’s a new account,* then you have 20 business days to issue provisional credit—or resolve the claim before you need to issue credit.
Depending on what type of transaction it is, you also have different time frame requirements for resolution: 45 calendar days if it’s an ATM or bill pay transaction, 90 calendar days for POS- or foreign-initiated transactions.
If you’re not confused yet, there’s more. You also have regulatory requirements for notification. For example, you must notify the cardholder that provisional credit has been issued within 2 business days, and you have to notify cardholders of resolution of a claim within 3 business days. All that, along with the network rules, makes things pretty complicated.
Dispute Volume Is Rising
To compound the complexity issue, providers also are dealing with increases in dispute volume. As prepaid cards gain popularity for everything from everyday spending and travel to online shopping, it’s natural that you’re going to see dispute volume increasing. Mercator Advisory Group estimates that by 2020, loads on reloadable open-loop prepaid cards will hit $204.8 billion.
What’s more, providers also face spikes in dispute volume around tax season or back to school when cardholders are getting big deposits into their accounts. There a couple of factors contributing to those spikes. As cardholders spend more, there are more opportunities for the cards to be compromised. Many providers see an uptick in unauthorized transaction disputes around those high-volume seasons. One reason is that fraudsters know when to expect the big deposits and can sit on compromised accounts until those deposits hit. Another contributing factor is first-party fraud, when the cardholder made or authorized the transaction but is claiming otherwise.
One of the more challenging aspects of Reg E is that the onus is on the issuer (or its partner) to determine whether or not an error occurred. In other words, the cardholder does not have to prove that there was an error. The issuer has to establish that there wasn’t one. That can be particularly challenging in the case of fraudulent claims in which the cardholder isn’t being honest.
Knowledge Is Power
So, back to the original question. What’s a provider to do? Here are a few best practices when dealing with Reg E error resolution.
1. Don’t Issue Provisional Credit Immediately. Some providers are concerned about running afoul of regulators by missing provisional credit deadlines. However, with prepaid programs in particular, you’re at a greater risk of losses if you issue provisional credit as soon as the cardholder disputes a charge. The concern with prepaid—and it’s a very real concern—is that if you issue provisional credit and later determine there was no error, the funds might not be there when you go back to reverse the credit. In many cases, prepaid providers don’t have any other account relationships with the cardholder, so they can end up taking significant losses.
We focus on trying to resolve as many cases as we can in the 10 to 20 business days before provisional credit is due. That’s not always possible because sometimes you might be waiting on a response from the merchant on a chargeback. Depending on the network, merchants initially have 30 to 45 calendar days to respond to a chargeback. But, if you can resolve the claim before provisional credit is due, that’s one way to mitigate the risk of losses.
2. Don’t Delay Your Investigation. Providers are not required to issue provisional credit if the cardholder doesn’t supply a written dispute form within 10 business days. However, you’re still required to investigate the claim in a timely manner. And, even if the cardholder submits the written dispute form on business day 10, provisional credit is due within 10 or 20 business days of the date the error was first reported—not 10 business days from when you receive the dispute form.
3. Get as Much Information as Possible during the First Call. When cardholders call in to report a dispute, it’s critical to ask probing questions to make sure your analysts have all the information they need to investigate the claim. Our specialized intake team only handles dispute calls—not other customer service inquiries—and they receive Reg E compliance and dispute management training to make sure they’re asking the right questions. That’s important because you want to minimize the need for reaching back out to the cardholder. And, you’re trying to find out as much information as you can about the alleged error, including things like “What is the status of the card? Is it lost, stolen or still in your possession? Have you given any other party authorization to use the account, how have you stored the PIN and what was the last valid transaction you can identify?”
These calls can take around 10 to 12 minutes on average but, at the end of the day, if you can get all the pertinent information in that first contact, the cardholder is going to be a lot happier, and you’re saving time and operational costs by not having to reach out for more information.
4. Contact the Merchant. As noted above, the more information you have about a transaction (or transactions) the better. Sometimes that requires reaching out to the merchant directly to find out about things like trial and cancellation terms or to request related documents.
One retail segment where it can be easy to spot first-party fraud is auto dealers. Believe it or not, people have disputed car and subsequent insurance policy purchases. That’s an instance where, if the dealer is cooperative, it can be pretty easy to determine who bought the car because a driver’s license would have been used to verify the identity of the buyer. Rent-to-own furniture stores also can be targets for first-party fraud in which cardholders will claim they never made the initial purchase and later dispute monthly charges. Again, reaching out to the merchant can be helpful to confirm delivery address details and match it to the cardholder.
5. Train, Train and Train Some More. The No. 1 best practice for Reg E error resolution is training and ongoing coaching. As discussed, this is a complicated process. As a third-party service provider to banks, we are audited by the issuing banks, but we also conduct our own internal audits to inform our training efforts. Where are areas that we need to refresh? How can we get our compliance scores even higher? We have strong compliance scores that we’re pretty proud of, but they require ongoing auditing, training, evaluation and retraining. Even when you’re good at this work, you can always get better.
6. Use Technology to Your Advantage. Reduce opportunities for human error with technology and automation. We’ve recently invested in technology called AdjustmentHub, which is a dispute management tool that has helpful features such as automatic timers, so the investigators working the cases are reminded to issue provisional credit before the 10- or 20-day window is up, and they receive notifications when the resolution time frame is getting close.
Some of the other benefits that made AdjustmentHub attractive to us are the customized work flows we can build for clients, having an audit trail for every action that’s taken in the system, the ability to build direct connections to the networks to automate the chargeback process, and the ability to connect with Verifi and Ethoca, two chargeback avoidance networks that enable issuers and merchants to resolve claims more quickly.
With the continued adoption of prepaid cards as well as data breaches fueling fraudulent activity, providers must have effective, efficient and compliant processes in place to manage transaction disputes, or partner with someone who does.
Loraine DeBonis is the marketing and communications director for Ubiquity Compliance Solutions, which specializes in dispute and chargeback management, fraud and identity verification services for the financial services sector. Previously, she spent 10 years writing about prepaid and emerging payments for SourceMedia and Paybefore. She can be reached email@example.com.
*A new account is defined by the regulation as one in which the disputed transaction settled within 30 calendar days of the first load/deposit.