How to Avoid Intentional Fraudulent EMV Chargebacks

Whether or not your business is brick-and-mortar or eCommerce, EMV® smart chip technology is having an impact on your business. So what does this mean? Some companies have embraced the new technology but have not set up processes to mitigate the possibility of fraudulent EMV chargebacks. At times, it can be difficult to discern those consumers out to get something for free from others that have just forgotten to update their new card information or have sent in an innocent inquiry to their banking institution. After all, you are no mind-reader, but nevertheless, your business is left holding the bag. Chargebacks and any related chargeback fee cause unnecessary hassle and impact the bottom lines of merchants. Create a process to engage consumers proactively and reduce the likelihood of unnecessary and potentially fraudulent chargebacks.

U.S. Merchants Feel the Shift

EMV smart chip technology has benefited from rapid incorporation from merchants in Latin America and Western Europe. The U.S. has only recently made more efforts towards adoption. Consumers now see EMV enabled payment machines as part of POS solutions at local retailers and stores. U.S. credit card merchant services must comply with the new cards that are being issued. In 2014, only 1.5% of retailers offering credit card payment options had adopted EMV technology. In 2011, 40% of Latin America and 80% of Western Europe provided consumers EMV smart chip technology at POS. There is a vast shift underway as there are 1.2B Cards in the U.S. that must be EMV enabled and 8M POS terminals that must upgrade to the new technology. Though credit card fraud has not seen a spike in the U.S., fraud losses are still a concern for merchants.

There are new demands on retailers and eCommerce merchants. October 2015 was the deadline for retailers of physical locations and banks to comply with EMV technology. Retailers that are not compliant are liable for fraudulent activity occurring at POS. Internet retailers are not under the same obligations or forced into the additional expense of upgrading to a chip-enabled POS terminal. Nevertheless, eCommerce merchants may find themselves having a harder time collecting payments with the issuance of new EMV chip credit cards. Netflix is an example of a subscription-based service with below-forecast revenue collection in the third quarter as a result of “slightly higher-than-expected” involuntary churn. Involuntary churn happens when merchants cannot collect scheduled payments because of communication problems, payment failure, and chargebacks. eCommerce merchants may see a spike in involuntary churn as EMV smart chip cards replace previous cards on file. While this isn’t necessarily a part of any intentional fraud, merchants should prompt consumers to update (new) card numbers and expiration dates during the checkout process.

Banks issuing EMV enabled cards may not provide the new information into account updates, so the onus is on merchants to proactively get new information from the consumers themselves. Excessive chargebacks and fraud can increase business losses from the involuntary churn. Business owners need to take additional steps to reduce the likelihood of fraudulent activity and chargebacks.

New Merchant Service Responsibilities

Merchants that have made the switch know of the upside of using EMV chip credit cards. For those businesses that accept card present transactions, EMV transactions at the POS terminal offer an additional layer of protection. Liability is on the issuing band when both the issuer (bank) and the merchant are EMV-compliant. Businesses also have the means to address card owners and address issues when face to face.

There is a significant liability shift that occurred October 1st. Merchant-processing statements will now include chargebacks that used to be borne by issuers. Merchants that do not have EMV acceptance or EMV-compatible terminal will have to pay fraud charges. Keep an eye out for any new charges on December and January merchant statements. eCommerce merchants continue to be vulnerable to online fraud.

Prevent a Fraudulent Chargeback

Merchants face challenges with EMV credit card implementation. Any amount, from $1.25 to $5K, for example, can query at a banking institution and merchants can receive a chargeback. No amount is too small. EMV chargebacks can be initiated as part of friendly fraud, whereby consumers contact the bank to start a chargeback rather than resolve disputes directly with merchants. Sometimes accidental friendly fraud occurs when card users ask a bank to clarify transactions or cancel subscriptions. An unintended chargeback than happens as the bank then initiates their chargeback process. Chargeback motives can occur due to buyer’s remorse or from a chargeback scam. Ultimately, businesses suffer as the chargeback system technology cannot adequately handle potential fraudulent threats and human interpretation and zero-liability at banks make chargebacks the easiest solution to satisfy banking customers. Merchants need to review their processes and reach out to prospective consumers. A few ways to improve customer service and reduce chargeback scams are to:

Initiate contact with repeat customers when unusual orders are placed. Verify that all information is correct.
Be clear on what consumers should expect. Accurately represent what the product does and any limitations.
Upload accurate descriptions and images of all items and services for sale. Consumers should know the exact dimensions, color, capabilities and condition of any product.
Post terms and conditions in an easy to read format on the payment page. Direct consumers on how to dispute any concerns with the business.
Phone numbers and emails should be clearly posted, as well as details on how to initiate a return at no additional cost.
Confirm the consumer’s shipping address. Paste the shipping address in quotes into Google and consider if it a shipment to such a location makes sense.

Conclusion

Improving communications with customers will help businesses reduce EMV chargebacks and decrease the potential of becoming a victim of a chargeback scam. eCommerce merchants would be well advised to upgrade their marketing materials and communications, and foster open communications with prospects and customers. It is your business and your livelihood that suffers from fraud. Take action to secure each and every valid transaction. If you are looking for more information about becoming EMV® compliant, you can call us at (888) 902-6227 or email info@getvms.com.

Here are some additional resources on the topic:

Will Retailers be Ready for EMV by Oct 2015?

How Ready are We for EMV in the US?

Prevent Chargeback Scams (Chargeback 911)

EMV Chip Card Changeover May Harm Subcription-Based Revenue

EMV® is a registered trademark in the U.S. and in other countries, owned by EMVCo, LLC.