Merchants without chip card readers are reporting that a few malicious customers have figured out how to game the system.

Last year’s fraud liability shift made it so that if a merchant does not have an EMV-capable chip card reader in place, the merchant is on the hook for any and all chargebacks and fraudulent transactions tied to EMV cards. But because of delays in the certification of EMV equipment software, many merchants are still unable to use chip card terminals despite their best efforts to put them in place.

Now it appears that some customers are using that knowledge to stick it to merchants.

Here’s the scenario: A customer goes to a restaurant and charges a $150 meal to a credit card. Having noticed that the restaurant does not have a chip reader, the tricky customer decides to go home and dispute the transaction, claiming that someone else must have fraudulently charged their card. In almost every case, the customer wins the dispute – even if there is evidence that the customer was the one who made the charge.

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Steven Martorelli, director of the ISO sales office for Turnkey Processing LLC, has been witnessing this kind of activity all year. He says that since the liability shift took effect in October 2015, in a typical week he sees five to seven of these types of disputes involving his merchant clients. Usually the charges are for a couple hundred dollars, perhaps to fly under the radar, but some amount to thousands of dollars in losses.

Even when a merchant can produce proof in the form of a signed receipt from the customer, or surveillance video of the customer making the charge, the customer still wins the chargeback dispute.

“We’ve been 100 percent unsuccessful with those cases, no matter what kind of evidence we supply,” Martorelli says. “It’s just automatically denied.”

One of Martorelli’s clients, an auto repair shop, received a dispute for $86 that came in as a fraud counterfeit transaction. The shop says the customer showed up in person to drop off the vehicle, and then signed off on an invoice that included line items for carburetor repairs and brake line replacements. “There was a detailed invoice and a signed customer receipt,” Martorelli says.

When the repair shop disputed the claim, the business received an automatic rejection from the bank citing the “Chip Liability Shift Program” as the reason for the chargeback.

Another client, a tile store, incurred a nearly $1,700 chargeback that the merchant challenged, only to receive a rejection with the same explanation: that an EMV chip card was presented at a non-chip capable terminal. For every 10 chargebacks that Martorelli sees, 30% to 50% on average come in for this reason.

“Instead of a liability shift, it’s just a monetary shift,” Martorelli says. “Merchants just pay more fees.”

Merchants must decide

As managing partner with merchant services company Processing Solutions Inc., Derrick Hess works with merchants across the country and agrees that there has been a significant rise in questionable chargebacks during the past year.

“It’s a huge epidemic, and the general public is becoming more aware of this,” he says. “It doesn’t take a criminal genius to figure it out. You go into a restaurant, and 85% to 90% of the POS systems out there are not EMV capable.”

Chargeback fraud is more likely to happen in larger cities, where there’s more anonymity, than it is in small towns and suburbs, Hess says.

In another example, Hess recently had a merchant who incorrectly keyed in a $103 charge as a $1,003 charge. The charge was on a PIN-based debit card.

The customer went back to the bank and said the charge should have been $103. Even though the charge was reversed, the merchant still got a chargeback for $1,003 and had to prove that the customer got their money back.

“Chargebacks are a nightmare anyway,” Hess says. “Even if you have a signature, the banks always favor the customers until proven otherwise.”

Some merchants are making a conscious decision to forgo chip card readers because they claim it’s more of a nuisance to use EMV, or because new equipment is too expensive.

One of Martorelli’s merchants told him that from a business perspective, the upgrade simply isn’t worth it. So the merchant just takes the hit of $50 to $150 a month in chargebacks.

“Some clients like restaurants end up trying the EMV machines and say they want their old machine back,” Martorelli says. “They say, ‘I’d rather take the chance.’”

Is there another way?

Another option for merchants that see a lot of these kinds of chargebacks is to ask the vendor for help finding alternative to absorbing the loss. For example, some vendors have indemnification programs in which they will take the loss on chargebacks since the merchant hasn’t been certified on time.

Even though merchants might not have much luck convincing banks that a customer was fraudulent, Martorelli recommends to his clients that they file a police report or seek legal action. Although if it’s over a couple hundred dollars, there might not be much the police can do.

“In the end, I feel like EMV hasn’t prevented any fraud,” he says. “It’s just opened up a new way for customers to defraud merchants.”

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