Every Merchant is talking about Chargebacks today. It’s the latest hot topic of late and for good reasons. 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. Issuing Banks and Financial Institutes are allowed to chargeback and/or pass back the fraud to the merchants who were not processing chip cards.

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

1) According to Merchant Stronghold Merchant Services, hackers and 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 gym 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 trend has been created, dubbed “friendly fraud” or in simple words “online shoplifter”, when the cardholder disputes a charge knowing that the merchant did not read the chip on the card. Cardholders disputes a charge with an intent to miss use the merchant’s terms and conditions and policies. Friendly fraud is especially difficult to detect and stop because it essentially pits a cardholder’s word against the merchant and bank, according to Apoorv Joshi

Merchants fight back

Merchants are beginning to fight back, primarily through Chargeback Companies and lawsuits against the Cardholders, Issuing banks and even 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.”

Visa chargeback changes

Visa went first, announcing several merchant-friendly changes. Visa also laid out two major changes to chargebacks. The goal was 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 and have to credit the Cardholder. This is a temporary change though  that is said to  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 2016. After that, the issuer takes responsibility for fraud. This is an interesting one. This is to limit serial chargebacks abusers of the whole payment process. Visa estimates these last two changes will cause merchants to see up to 40 percent fewer counterfeit chargebacks and a 15 percent reduction in U.S. counterfeit fraud dollars being charged back each year.

This was not it, Visa’s announced changes to its chargeback policy, limiting issuers to chargebacks over $25, and no more than 10 per account!

American Express likewise followed suit in making similar changes to its chargeback policies.  Similarly, MasterCard announced policy changes too. MasterCard also added that “The MasterCard network system will now prevent invalid chargebacks for fraud occurring at ATMs and automated fuel dispensers where liability shifts do not go into effect until October 2016 and October 2017, respectively.”