The U.S. EMV migration has been rough, but one of the sharpest pain points of all was felt by merchants not yet processing chip cards who were hit by a costly surge in chargebacks.
Thousands of merchants reported an uptick in chargebacks beginning early this year, and for many it has not abated.
Liability for counterfeit card fraud—plus lost and stolen card fraud—lands with the party that has not successfully migrated to EMV after Oct 1, 2015. But for many merchants, the number of chargebacks far exceeded expectations.
Now, just about two months away from the one-year anniversary of the U.S. chip-card liability shift, chargeback volumes are still high because merchants lag far behind issuers in EMV readiness, said Randy Vanderhoof, director of the U.S. Payments Forum.
“Chargeback volumes are still high and even increasing at merchants who are not chip-enabled, as the fraudsters shift to the least secure merchants,” Vanderhoof said.
Some merchants initially accused issuers of forcing them to cover many disputed transactions with little or no documentation for backup, and the U.S. Payments Forum, a cross-industry organization previously called the EMV Migration Forum, aims to help resolve the situation.
This month the U.S. Payments Forum produced a white paper outlining best practices and guidelines for issuers, merchants and acquirers handling chargebacks.
The paper may provide some clarity about who is liable in various chargeback scenarios, but there is no immediate relief in sight for merchants still awash in chargebacks from counterfeit transactions.
One thing is clear: Merchants never realized how much counterfeit card fraud lurked in their stores prior to the liability shift, according to Vanderhoof.
“Chargebacks started ramping up shortly after the holiday season concluded [in 2015],” Vanderhoof said. “Most of these chargebacks are resulting from fraud that was already in the system but not visible to many stakeholders.”
Counterfeit card volume overall has dropped as more merchants upgrade their terminals to accept chip cards, according to MasterCard and Visa. But with so many merchants still not EMV-ready, the U.S. Payments Forum cannot forecast when chargebacks will begin to abate significantly.
“We don’t have a projection of when chargebacks will begin to decline, but opportunities for chargebacks will decline as merchants enable chip terminals,” Vanderhoof said.
Issuers and merchants in recent months have worked toward establishing clearer policies about who is liable for disputed and counterfeit card transactions, he noted.
“Early on, there was a great deal of confusion about chargebacks, but that has largely dissipated—it’s all part of the technical and operational learning curve across a broad number of participants,” Vanderhoof said. Training and communication of staffs at issuers and merchants that manage chargebacks also improved significantly since the surge began, he added.
The U.S. Payments Forum’s 17-page white paper explains who is liable—the issuer or the acquirer/merchant—when transactions are charged back. Most disputes are resolved between the issuer and the acquirer/merchant, and where agreement can’t be reached, final resolution rests with the network responsible for processing the transaction, according to the white paper.
Card networks’ policies on chargebacks on lost and stolen cards vary, and the U.S. Payments Forum recommends that banks ensure that each individual fraud case or potential fraud case is investigated and evaluated before any action is taken.
The U.S. Payments Forum also recommends that in no circumstances should banks authorize automatic chargebacks or account charge-offs or closures. It also recommends that banks' platforms for handling fraud and disputes be synchronized for speedy resolution.