The confusion over how banks categorize chargebacks has become the latest minefield in the transition to EMV chip cards in the U.S. And the sheer volume of chargebacks has forced some merchants to turn to legal action, questioning the entire migration process.
E-commerce merchants have long been warned about mounting chargebacks as a consequence of EMV security driving fraud away from the point of sale, but card-present retailers are seeing the same trend.
As merchants receive their first round of post-EMV chargeback statements, many are complaining about the high number of chargebacks that appear unrelated to EMV and the October 2015 liability shift. After that date, companies that did not adopt EMV became liable for fraud on those cards.
As such, it's clear merchants can experience questionable chargebacks regardless of their EMV status, said Gray Taylor, executive director of Conexxus and financial policy consultant for the National Association of Convenience Stores.
But the lion's share of the chargeback woes is definitely falling on those who have not converted from mag-stripe technology to EMV chip cards.
"To be fair, any time you make a major change in the operating rules, everybody has to learn to play by the new rules," Taylor said. "If it's your bank, when in doubt, you are going to say to charge it back out."
In that scenario, banks that are not sure if a chargeback resulted from a counterfeit card, or from a lost or stolen card, simply charge everything back to the merchant, Taylor added.
Merchants that can devote the time and staff to research their chargeback statements and challenge the ones they don't believe are correct "have universally gotten them reversed," Taylor said. The problem is, most merchants don't have that kind of time, and if they are not EMV compliant, they are unwittingly just paying all of the chargebacks, he added.
Security vendors who interact with merchants regularly are finding a lot of confusion and frustration when it comes to chargebacks. The process is slow, inefficient and costly for all involved, said Keith Briscoe, chief marketing officer for Ethoca, a company specializing in data sharing that helps merchants and issuers communicate to cut down on friendly fraud.
"There is also increasing consumer awareness about the chargeback issues," Briscoe said. That awareness, coupled with cardholder-focused banking regulations, it makes it easy for cardholders to dispute transactions, he added.
Even when merchants challenge a chargeback with what they believe to be compelling evidence, they often "lose and don’t understand why," Briscoe said. Still, through the process, merchants are becoming more educated about the risks if they are not EMV compliant, he added.
In an odd twist of the data security equation, the best way for merchants to monitor transactions for future chargeback challenges is by storing Track 2 magstripe data. But the Payment Card Industry Security Standards Council has prohibited this practice for years.
While some early research has indicated chargebacks to merchants are indeed rising because of the EMV liability shift, it has been harder to pinpoint if banks are knowingly sending every chargeback under the sun to merchants regardless of category or code.
Some analysts began documenting the practice in late January, warning that merchants weren't going to like what they were seeing as chargebacks mounted.
"We've looked at some processor level data around the number of EMV transactions and some informal conversations with card issuers, and we have heard from our issuing clients that they are definitely charging back a lot," said Jeff Crawford, a senior consultant for First Annapolis Consulting LLC.
"It is probably fair to categorize that there are at least as many issuers out there that are taking an aggressive posture in terms of capitalizing on the chargeback liability," Crawford said.
However, First Annapolis has not established the volume level of the types of chargebacks that could support or refute what merchants are claiming, Crawford added.
It leaves merchants in a awkward situation in which they don't know what they don't know.
"We really have no idea how the banks go about categorizing these chargebacks," Taylor said. In the pre-EMV era, merchants knew they would not get the bill for chargebacks on stolen or lost card transactions. But if a consumer does not report a card as stolen, those transactions may bounce back as counterfeit fraud, Taylor added.
"Fraud costs are now on the merchants, but the merchants have no control over fraud control measures," Taylor said. "They can't tell you to get a PIN on your card."
So far, many small merchants have not experienced a significant problem yet, especially those in the fuel industry, which has until 2017 to comply with EMV standards in the U.S., Taylor said.
"If you steal a card, it is hard to get your payback going to a convenience store to buy a Twinkie," he added. "But if you are a Best Buy or Home Depot, or any big company not EMV compliant, they are just getting raked over the coals."
Some angry retailers are taking a different approach to the chargeback dilemma, arguing instead that the card brands and banks knew all along that merchants would not have time to comply with the October 2015 liability shift, thus setting up a big payday for the banks.
Non-compliant California retailers B&R Supermarket Inc. and Grove Liquors LLC filed a lawsuit last week in the U.S. District Court for the Northern District of California to challenge the major card networks, the largest banks and the EMVCo standards body.
The retailers report facing 88 chargebacks from October to February, totaling $10,000, compared to four in the same time period last year. The federal anti-trust suit seeks class-action status, with retailers saying those not EMV compliant have already lost billions of dollars.
The retailers point to the unforeseen delays in the EMV process, such as the debit networks' struggle to agree on common application identifiers for routing, as making it more difficult for merchants to meet the October 2015 deadline.
Other markets converting to EMV were offered compensation in the form of lower interchange to offset the transition costs, the retailers said, yet they were offered no such compensation in the U.S.
"We're aware of the filing and are currently reviewing the claims," MasterCard spokesman Seth Eisen said. "What I can say at this point is what we’ve said since introducing our roadmap in early 2012. There was never a requirement for any party – issuer or merchant – to move to EMV."
Visa did not respond to inquiries about the chargeback confusion or the California lawsuit.
Using insights from merchants, issuers and others, MasterCard's roadmap and the related liability shift provided incentives to prompt for the most secure ways to pay, Eisen said.
"We have and continue to work with parties across the industry – merchants, issuers, processors, manufacturers – to assist in this migration," he added.
However, the process still remains troubled by technological, cultural and legal concerns.
"I think it will be a bumpy ride for a while," First Annapolis' Crawford said. "Smaller merchants and others not EMV compliant haven't fully seen the impact yet, and it is going to hurt those guys the most."
All it will take is a couple of large chargebacks to hurt cash flow at a small business and put it in danger, Crawford added.