Bringing the API Revolution to Chargeback Mitigation

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By Ronen Shnidman

Financial services have been undergoing a revolution over the past decade thanks to open application programming interfaces (APIs). APIs are the building blocks that serve as intermediaries to transfer information between applications. An “open API” is an API that is accessible to third-party developers outside a given company. The motivation behind APIs is a simple one: to remove the need to build a specific functionality from scratch by connecting to pre-existing software. By abstracting away business functions, open APIs allow companies to focus on where they are different from others and add value.

APIs’ impact on financial services

Nowadays, it is quite common for new eCommerce businesses to quickly set up to start processing credit card payments by connecting via API to a payment service provider (PSP). In ecommerce, for both in-app and point-of-sale payments, authorization is implemented as an API call to the payment gateway. The gateway and payment processor then perform required validation and risk checks and ask the corresponding card network to authorize the payment from an issuer to an acquirer. APIs have transformed PSPs essentially into tech companies that make sure payments services become integrated with the whole customer journey of the shopping cart software used by merchants.

Other areas of financial services have also been opened up by open banking APIs, such as money exchange, brokerage accounts and lending. Companies like Revolut, Wise, SoFi and Plaid come to mind as fintechs that wouldn’t exist without open banking API technology.

The coming abstraction of chargeback mitigation

One area that APIs are still in the midst of changing is chargeback mitigation. A majority of merchants still handle their own chargebacks even though chargeback remediation is not the primary focus of their employees. Unsurprisingly, surveys in recent years show merchants’ average chargeback reversal success rates in the range of 20-30 percent. This average win rate signals the remaining room for improvement merchants can achieve by outsourcing their chargeback mitigation efforts.

By way of comparison, the chargeback mitigation company AcroCharge has an 83 percent success rate. AcroCharge provides a tailored solution that combines technology with human know-how to achieve the highest success rates in the industry. The company uses an API to access merchant’s customer data for effective chargeback management.

Many, probably most, merchants who are not integrated by API with an external chargeback mitigation solution have little to no automation of their chargeback management process. Their reliance on manual human processes instead of software slows down chargeback analysts and increases the resource cost of chargeback management.

A future based on extensions and partnerships

The future of chargeback mitigation for online merchants is in API integrations on existing marketplace platforms. Speed is of the essence when it comes to bringing goods and services to market online. Why build out a chargeback team or even go through an RFP process directly with a chargeback solution vendor when you can just address the problem with a few clicks on a marketplace extension? Whether on general marketplaces like Magento, Shopify or more specialized marketplaces like Guesty for short-term rentals and freelancer site Upwork, online sellers would benefit from easy access to chargeback mitigation via API.

Similarly, there is a trend in the anti-fraud space towards all-in-one solutions. This means solutions like Sift and Riskified have moved from just pre-transaction payments fraud prevention to things like user account protection and promotion abuse prevention. Adding chargeback mitigation via API to these anti-fraud offerings makes sense both from the vendor and the client perspective. For the vendor it adds post-transaction friendly fraud funds recovery to their solution. For the merchant it saves the trouble of managing an independent relationship with another vendor and significant development time.

Until now, chargeback mitigation solutions have worked mostly in partnership with anti-fraud solution providers to provide their clients with chargeback defense. However, as anti-fraud solutions continue to morph into larger platforms expect integrations to occur.

APIs will foster more chargeback outsourcing

The advance of the API economy along with an anticipated rise in friendly fraud should lead to the greater adoption of chargeback mitigation services. The logic is simple: why distract yourself from your true value add when you can outsource the hassle and complexity of chargeback management.

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