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Chargeback Policy Changes – What are They and How Did we Get Here?

Chargeback Policy Changes – What are They and How Did we Get Here?
Posted: Jul 12, 2016
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Author: Barney Moore

Chargebacks to merchants have become a hot topic of late. And for good reason. According to a recent report by First Annapolis Consulting, chargebacks for card-present transactions increased 50% following the October 1 EMV liability shift.  While this took merchants by surprise, it did not surprise issuers who, until the October 2015 liability shift for chip cards processed at card-present non-chip terminals, were absorbing the cost of fraud for counterfeit cards. Now issuers are allowed to chargeback, or pass back the fraud to the merchants who were not processing chip cards.

Delays in terminals certification causes backlogs

Many merchants had their chip-capable terminals in place in time for the liability shift, or shortly thereafter. The problem came that having the terminal be hardware-capable of reading a chip wasn’t enough; the terminal had to be certified. Some merchants didn’t know how to obtain the certification while others were waiting on their terminal vendors or 3rd party organizations to perform the certification. These vendors and 3rd parties were swamped with requests, and faced with an entirely new process, creating a backlog that continues today.

This last point is important, as the data shows that there are two drivers of the high chargebacks -

1) According to Heartland Payment Systems, criminals are avoiding businesses that are processing chip cards and merchants processing mag stripe only are bearing the brunt of chargebacks. For example, a small grocery store chain in south Florida was hit with $10,000 in chargebacks from October 2015 through March 2016; in the same period in the prior year they had just $89 in chargebacks.

2) A new headache has been created, dubbed “friendly fraud”, when the cardholder disputes a charge knowing that the merchant did not read the chip on the card. Friendly fraud is especially difficult to detect and stop because it essentially pits a cardholder's word against the merchant and bank, according to PaymentsSource.

Merchants fight back

Merchants are beginning to fight back, primarily through lawsuits against the Visa and MasterCard branded networks. One such lawsuit claims that “major credit card companies and the nation's largest banks conspired to shift liability for fraudulent credit card transactions in the U.S. to merchants. The complaint claims that the move to cards that include electronic chips designed to be more secure—so-called EMV chips—has been plagued by technical glitches and used as cover to illegally shift fraud-protection costs.”

With the difficulty some merchants are having getting their terminals certified, with the chargebacks and mounting ire, the card networks acted quickly to take necessary steps to mitigate the underlying issues. Visa went first, announcing several merchant-friendly changes. Visa streamlined the certification process with the intent to reduce the length of time for certification process by 50% and then went even further by allowing merchant acquirers – banks that process merchant’s card acceptance business, to “self-certify”.

Visa chargeback changes

Visa also laid out two major changes to chargebacks, with a goal to reign in the friendly fraud and the volume of chargebacks merchants have to deal with. Beginning July 22, 2016, chargebacks for counterfeit fraud for transactions under $25 will be blocked – meaning issuers will have the liability for this fraud. This is a temporary change that will expire in April 2018. Another change is that the merchant is now only liable for the first ten chargebacks on any given card, as of October. After that, the issuer takes responsibility for fraud. This is to limit serial abusers of the chargeback process. Visa estimates these last two changes will cause merchants to see 40 percent fewer counterfeit chargebacks and a 15 percent reduction in U.S. counterfeit fraud dollars being charged back.

As a follow-up to Visa’s announced changes to its chargeback policy, limiting issuers to chargebacks over $25, and no more than 10 per account, MasterCard announced similar policy changes. MasterCard also added that “The MasterCard network system will now prevent invalid chargebacks for fraud occurring at ATMs and automatic fuel dispensers where liability shifts do not go into effect until October 2016 and October 2017, respectively.” American Express likewise followed suit in making similar changes to its chargeback policies.

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