After the Oct. 1 EMV liability shift takes effect, the process of handling chargeback disputes could get messy for merchants unfamiliar with the new factors in play.
Merchants will face more questions when they deal with chargebacks that take into account whether the transaction took place with an EMV-chip card, said Gil Luria, analyst with Los Angeles-based Wedbush Securities.
"As we transition to EMV, merchants will have more disputes with chargebacks and will have many more reasons for it," Luria said.
Accompanying the EMV shift, more consumers are shopping online, and fraud is likely to shift to the Web as EMV improves defenses at the point of sale, Luria said.
Verifi Inc., a provider of payment and risk management software for card-not-present merchants, is hoping to smooth out the chargeback process through a partnership with Pegasystems Inc., which offers a Smart Dispute for Issuers platform for retail banks to better automate the process.
The goal is to address chargeback situations in real-time by identifying the disputes that are most clearly fraudulent.
"Any small gain in streamlining the chargeback process is a big benefit to those handling that costly process," Luria said.
Verifi and Pegasystems can possibly halt fraudulent transactions before a merchant ships a product or the bank has taken funds from the merchant's account to cover the chargeback, said Verifi CEO Matthew Katz.
The timing for the partnership with Pegasystems is ideal, Katz said. "The bizarre thing is that, right now, we are seeing more chargebacks than we have ever seen before."
This trend may be a sign that fraudsters have already migrated to card-not-present channels to avoid EMV security, but it is odd that chargebacks "have gone through the roof" before EMV is firmly in place at the physical point of sale, Katz added.
All major processors and issuers are bracing for an onslaught of chargeback disputes. Verifi and Heartland Payment Systems joined in a referral agreement in May to provide Heartland e-commerce clients with risk analysis to limit chargebacks.
In the meantime, technology continues to advance to thwart in-store chargebacks as well, such as Alibaba's use of QR product coding that indicates where an item was purchased as a way to stop criminals from trying to return stolen items for cash.
"Most physical merchants are not prepared for EMV and we are going to see a lot of chargebacks forced on the merchants," Katz said. "But as they convert to EMV, the sharp increase will come in the card-not-present space."
Merchants are fighting back through security products like 3D Secure, Verified by Visa and MasterCard SecureCode. "They want to shift the liability back from the merchant to the issuer in card not present," Katz said.
With EMV in place, chargebacks will go to the party that does not support the chip-card technology. But issuers have to be diligent in their chargeback coding to automatically win a dispute after the liability shift occurs, said Brian Riley, principal executive advisor with CEB TowerGroup.
"If they already issue an EMV card, but the merchant is not accepting it, they should be very aggressive in using the chargeback codes," Riley said.
The codes follow the International Standards Organization messaging format to communicate chargeback and resolution issues with the merchant. Those codes now include a specific message related to the EMV liability shift.
Still, chargebacks have been around far longer than EMV, which won't be a factor in all future disputes. The majority of chargeback claims made by consumers, at 52%, fall into the "unrecognized transaction" category, according to CEB TowerGroup research. Some of those may be from fraudulent card use, but some result from vague information on the cardholder's statement.
Verifi and Pegasystems want the combination of their technologies to provide better descriptions of transactions so as to eliminate unnecessary chargeback disputes.
"If you look at a payments statement, there is no information to tell you what you purchased," Katz said. "Consumers spend a lot of time trying to decipher, or they will call with questions. If the merchant has a way to share more information with the issuer, it helps everyone."
It has become increasingly common for a consumer to not recognize a transaction on a statement, CEB TowerGroup's Riley said. "If I go to a Shell gas station and use my card, it might show up on my statement as SHO No. 32, and I would think I have never been there or even know what that is, so I would dispute that charge."
Issuing banks earmark a significant portion of their budgets to handle chargeback disputes and they all have write-off thresholds, Katz said. While it is expected issuers may continue to absorb low-value chargebacks related to fraudulent mag-stripe transactions at the point of sale even after the liability shift, that could change as EMV becomes more common and card-not-present fraud rises.
"Over time, as write-offs go up, it is inevitable that they would reduce that write-off threshold to better manage their own liability and exposure," Katz said.