Fraud Chargebacks Spike 25% Post-EMV

Angel Abcede, Senior Editor/Tobacco, CSP

Credit card fraud

BOSTON – Retailers in the first half of 2016 saw a 25% spike in bank chargebacks in the wake of EMV migration in the United States, according to a new study.

Boston-based Aite Group estimated that retailers will experience $5.8 billion in chargeback volume this year, although it represents only 0.02% of total payment volume. Of those chargebacks, 60% to 70% are the result of fraud, with the balance being service and support disputes.

Despite the increase in chargebacks (or when banks or card issuers place the responsibility of fraudulent credit- and debit-card purchases back on the retailer), the recently released report said those volumes will “gradually ease” as more merchants upgrade to EMV-capable terminals.

In the meantime, the report cited how several grocery stores banded together in a class-action lawsuit against the card brands, as well as a number of large issuers, alleging that bottlenecks in the certification process prevented them from upgrading to EMV by the Oct. 1, 2015, deadline. As a result, the stores are now absorbing 20 times more chargeback expenses than they were prior to the liability shift, the report said.

The report also outlined a six-step process by which issuers charge fraudulent EMV (Europay MasterCard Visa) purchases back to retailers. Here are those steps ...

Step 1: Customer calls bank

Customer calls bank

The process starts when the cardholder contacts the issuing bank to dispute the transaction. This can be done via the contact center, with some issuers also providing customers with the ability to dispute a transaction through online banking.

Step 2: Issuer decides action

Issuer decides action

Once the issuer determines that the dispute meets the eligibility criteria set by the payment networks, it will give the cardholder provisional credit. If the dispute is for a transaction type for which liability rests with the merchant, then the issuer forwards the chargeback on to the merchant’s acquiring bank, which in turn passes the chargeback on to the merchant. Not all disputes are eligible to be charged back to the merchant. For example, liability for counterfeit fraud at gas pumps remains with U.S. issuers until October 2017. Funds for the transaction are withheld from the merchant until the dispute is resolved.

Step 3: Merchant finds proof that purchase is valid

Merchant finds proof that purchase is valid

The merchant will review the transaction to determine whether it has compelling evidence that supports the validity of the transaction. If it does, then it will initiate a re-presentment of the chargeback.

Step 4: Issuer reviews evidence

Issuer reviews evidence

The issuer reviews the evidence and will determine whether it refutes the cardholder’s dispute.

Step 5: Issuer sends second chargeback if merchant claim is denied


If the issuer does not deem the evidence compelling, then the issuer has 45 days to send a second chargeback.

Step 6: Option to arbitrate

Option to arbitrate

If the merchant disagrees with the issuer’s decision, then it has the option to take the chargeback to arbitration by the payment networks.

The high-level process holds for both debit and credit transactions, although the time frames are somewhat different. Credit-card customers have 120 days from the transaction date to dispute a transaction, while the time frame for disputing personal identification number (PIN) debit transactions can be as short as 60 days. PIN debit also leaves a portion of the liability with the consumer, although in fraud cases the issuer will often choose to absorb the loss in order to preserve the customer relationship. As a result, debit transactions see lower chargeback rates, averaging around 1 basis point vs. an average of 3 basis points for credit-card transactions.