Credit card fraud is bad for everyone but the fraudster. As a consumer, you might spot fraudulent transactions on your credit card statement that send you into a panic. You’re anxious to receive financial reimbursement, safeguard your identity and determine how your payment information was obtained.
Businesses stand to face huge losses as well: They absorbed 38 percent of U.S. fraud losses in 2014, totaling $2.95 billion. If a business can’t properly fight the fraud, it takes the loss.
The trend isn’t letting up. Monthly fraud attempts and the percent of revenue lost to fraud both peaked in 2016, according to a study by LexisNexis; and The Nilson Report expects global credit card fraud to surpass $35.54 billion by 2020. The United States experiences the highest percentage of fraudulent transactions in the world.
Customers and businesses aren’t the only parties that pay for fraudulent credit card losses. The card issuers pay in the event that the claim is deemed legitimate, and the business successfully defends itself.
So, how do businesses successfully defend themselves, and how can claims be illegitimate? The short answer is that there isn’t a short answer. There are numerous steps to resolving a dispute that consumers and business owners need to understand.
What Is a Chargeback?
Stemming from The Fair Credit Billing Act of 1974, chargebacks were invented to protect consumers. In the event that cardholder information is stolen and used to make unauthorized purchases, consumers have the right to file a chargeback with the card issuing bank to receive financial reimbursement.
All four major U.S. card networks (Visa, MasterCard, Discover and Amex) honor customer chargebacks in the event of unauthorized use. Listed below, however, are a few scenarios in which chargebacks are inadvertently or intentionally abused.
- True fraud occurs when a credit card is used by a thief who acquired the card information either through a lost or stolen card, a terminal skimmer or an online hack.
- Friendly fraud occurs when a cardholder files a chargeback due to forgetfulness, inability to recognize a purchase, or card use by a family member or friend. The chargeback is filed without ill intent.
- Chargeback fraud occurs when a chargeback is filed to receive a refund without having to return the item. This is virtual shoplifting because the purchaser keeps the item without paying for it if the chargeback is processed.
Many business owners believe chargebacks are impossible to win. It’s true that it can be difficult to discern between true fraud, friendly fraud or chargeback fraud and determine responsibility for the dispute, but it is indeed possible to win a chargeback.
What does merchant credit card processing entail in the event of a chargeback? It’s a complex dance, really.
8 Steps in the Chargeback Process
Any credit card dispute undergoes an intricate back-and-forth exchange in which the transfer of funds and burden of proof switch hands.
Step 1: The customer files a dispute.
Regardless of fraud type, a cardholder can file a chargeback by calling the bank that issued the credit card (referred to as the issuing bank) to dispute however many transactions the customer deems fraudulent. Most issuing banks have time restrictions for reporting claims and some might not reimburse transactions in full if not reported promptly.
Step 2: The issuing bank reviews the dispute.
The issuing bank reviews the customer’s dispute and notifies the relevant card network if the claim seems legitimate.
Step 3: The issuing bank credits the customer.
Meanwhile, the issuing bank reimburses the customer for the disputed transactions. The card network reaches out to the business’s bank (referred to as the acquiring bank) to notify it of the dispute.
Step 4: The acquiring bank passes the chargeback to the business.
The acquiring bank passes the chargeback to the business and withdraws funds from the business’s bank account. This is usually the first time the business is notified of the dispute, which could be for a transaction that occurred weeks or months prior.
Step 5: The business can choose to respond.
This is the business’s first opportunity to fight the chargeback. To fight it, a business owner can provide a signed receipt to prove the transaction’s authorization, show that fraud-prevention measures like AVS and CVV were implemented, or offer any documentation illustrating previous interactions with the customer such as past transactions or emails.
Essentially, the business simply has to show that it did its due diligence to prevent fraud. Sadly, some consumers target businesses that skimp on these best practices with chargeback fraud because they know such disputes will be easily won.
If the business does not respond, the chargeback process simply ends with the customer receiving reimbursement at the expense of the business’s bank account. If the business can provide persuasive evidence, the process continues as follows:
Step 6: The acquiring bank reviews the response and relays it to the issuing bank.
If the acquiring bank finds the evidence compelling, it’s passed back to the card network, which then notifies the issuing bank. From here, the issuing bank makes a call to determine the legitimacy of the customer’s dispute.
If the issuing bank considers the chargeback valid, the process ends with the customer receiving a refund. If not, the reimbursed funds are removed from the customer’s account and returned to the business’s bank account. The customer then has the opportunity for recourse.
Step 7: The customer can elect to issue a second chargeback.
By disputing the charges again, the customer enters into pre-arbitration. This starts the process again from step one.
Step 8: The issuing bank can push for arbitration if the business wins again.
The business has the choice of whether to respond to the second chargeback. If it does respond and wins, the issuing bank can move for arbitration (essentially a third chargeback), and the business then incurs a $250 fee.
If the business wins in arbitration, it’s absolved of the chargeback and the $250 fee. If the business loses, it pays for the disputed transactions and is levied another $250 fee.
How to Fight a Chargeback Dispute
We say this to the point of making it cliché, but a signature is your best defense against a chargeback. It’s not your fault as a business owner for accepting the signature of a fraudster; you simply need to demonstrate your intent to obtain authorization.
Chargebacks are not only expensive — they’re risky. A chargeback ratio exceeding 1 percent could result in the termination of your merchant account. Even if you’ve yet to receive a chargeback, it’s a best practice to always obtain a signature, store your signed receipt copies and document any written customer communication in case it’s ever needed.
You can avoid the many costs of printing and storing paper receipts (as well as the time searching for the copy you need) by opting for a provider that can capture digital signatures that are safely stored in the cloud and can obtain remote signatures for card-not-present transactions.
According to Monica Eaton-Cardone, co-founder and COO of Chargebacks911, all this evidence paired with a well-crafted rebuttal letter makes a big difference:
The key to successful representment is compelling evidence — the formal documentation proving that the initial transaction was valid. This can include sales receipts, order forms, tracking numbers, delivery confirmation, and emails or other communications with the customer, just to name a few. It’s essential that merchants keep this documentation organized and ready in case of a chargeback, as it will be the only thing upon which they can build a case.
Along with compelling evidence, the merchant also needs to draft and submit a rebuttal letter. This key document frames the merchant’s case, explaining in a clear and professional manner why the charge was valid and how the evidence demonstrates that fact.
So far we’ve only covered customer-initiated chargebacks. Unfortunately, there’s more to unpack when it comes to bank-initiated chargebacks.
Fighting Bank-Initiated Chargebacks
We already delved into the topic of bank-initiated chargebacks here, but in brief it’s a new type of chargeback that targets businesses that haven’t upgraded to process EMV chip cards. These chargebacks aren’t enacted by the cardholder and cannot be won with a signature.
EMV chip cards were recently adopted in the United States after successfully reducing fraud in numerous other countries. However, EMV technology is only effective when processed with an EMV-ready terminal.
After the liability shift, the card brands moved the costs associated with fraudulent transactions from themselves onto businesses in the event that a chip card is swiped instead of inserted in an EMV-ready terminal. The liability shift and bank-initiated chargebacks both act as incentives for businesses to upgrade their technology. Unfortunately, many businesses have updated their hardware but can’t actively process EMV chip cards because their providers aren’t EMV-certified. In such instances, working with an EMV-certified provider is your only way around a bank-initiated chargeback.
The Best Practices for Winning a Chargeback
We covered a lot, here is a summary of the best practices that will help you defend your business against chargebacks:
- Always obtain a signature, even for card-not-present transactions
- Partner with an EMV-certified provider
- Always use fraud-prevention measures like AVS and CVV for card-not-present transactions
- Ensure your customers properly insert chip cards and swipe magstripe cards (some terminals won’t accept improper entries, which helps)
- Partner with a provider that makes transaction histories easy to search and reference
Have you ever fought a chargeback and won? Does your business adhere to the best practices listed above? Let us know about your experiences below.