Chargebacks: Fraud or Fiction?

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Merchants these days are shouldering more responsibility for fraudulent transactions, thanks to the EMV liability shift. Unfortunately, some shady consumers are taking advantage. Friendly fraud, or chargeback fraud, is when a consumer genuinely purchases goods or services and later disputes those charges with their card issuer.

You can put your best foot forward by making sure your customers verify their identity with a signature or PIN. But, your merchant bank or merchant services provider (MSP) is also required to follow an investigative process to ensure that a chargeback is valid – regardless of your current EMV status. You need to make sure you hold them to that.

Holding Your MSP’s Feet to the Fire
If you’re seeing suspicious chargebacks with the EMV reason code, you should lay the pressure on your MSP to provide evidence that you’ll only be held responsible for chargebacks that are allowed under your contract and according to the EMV liability shift. Here’s how:
  1. Review your contract to see if there’s language that allows your MSP to pass the chargeback fees associated with the EMV liability shift onto you.
  2. Ask your MSP to explain their chargeback investigation process, including how they identify the difference between counterfeit and friendly fraud.
  3. Pressure your MSP to provide evidence that a chargeback with the EMV reason code is actually for counterfeit fraud, where an EMV card’s track information has been used to create a fake card and then swiped.
  4. Urge your MSP to work with the card-issuing banks and the card brands to provide clear information to merchants about how they justify what falls under the EMV reason code for chargebacks.
Bending the Truth
Consider, for example, this scenario: You own a high-end spa on Main Street and Suzy Soaplover purchases $600 worth of specialty services and goods – everything from an aromatic body wrap, mani/pedi, and blow out to luxurious bath salts to take home. Suzy loves soap so much she even signs up to receive emails about future sales. You don’t have EMV yet, so you verify her identity by confirming her ID and signature. All is good and well until a few weeks later, when you receive your monthly statement from your MSP and find out that Suzy was a little sneaky. She disputed the charge at your spa, claiming she was never there. When you provide evidence to prove that she was, it’s ignored.

If a cardholder can perform this type of fraud and merchants are required to eat the chargeback fees, loss of goods, and profit simply because they don’t process EMV cards yet, then the card brands and MSPs have failed the merchants because they can’t – or won’t – actually distinguish counterfeit from non-counterfeit charges. To make matters worse, there is no regulatory body that requires them to make that distinction.

The card issuer and your MSP already made money on the interchange for the initial transaction, will save time by not performing an investigation, and will gain more money from the chargeback and additional processing fees. From their end, they’ve got nothing to lose by charging you for all fraudulent transactions. But, this goes against your agreement with your MSP and the stipulations for the liability shift itself. The deck is stacked against merchants, unfortunately, but that doesn’t mean you are completely powerless when the chargebacks come rolling in. That’s why it’s particularly important to pay attention to these chargebacks and urge them to provide evidence to ensure that everything is fair and square.

We don’t know how widespread the issue is of MSPs not allowing merchants to contest chargebacks even when there is evidence a charge is genuine, but it is happening. So, we can’t help but wonder whether we’ll soon see more lawsuits like this one.

For more information about EMV, visit shift4.com/emv.