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CoverStory

Assessing the problem But a significant share of chargeback fraud is malicious,
as when cardholders falsely claim they did not purchase
The card brands' chargeback rules originated in the 1970s items or that items were never delivered, or when a card
in part to encourage consumer adoption of fledgling number is stolen and used for fraudulent purchases.
card payment methods with assurances of zero liability Malicious chargebacks have become so prevalent in
for fraudulent transactions. However, over the decades ecommerce some refer to it as "cyber-shoplifting."
chargebacks have become a huge money pit.
"As merchants open up more channels [of commerce]
Since they know they won't be held liable for problem unfortunately, one of the side effects we're seeing is a
transactions, many cardholders have grown accustomed greater chance of fraudulent chargebacks occurring,"
to filing transaction disputes with their card issuers Marchand said.
rather than attempting to resolve problems directly with ClearSale has identified six categories of merchandise that
merchants. Indeed, 45 percent of consumers surveyed are most at risk of chargeback fraud.
last year by Javelin said they had disputed at least one
card transaction over the previous year; 25 percent had They are:
disputed more than one.
1. Clothing
While a seemingly simple process for cardholders, 2. Jewelry
chargebacks have become a major drain on resources 3. Furniture
and finances for merchants and issuers. Javelin estimates
chargebacks were a $31 billion problem in 2017 – an 4. Products that can be easily sold
amount equal to just under 1 percent of total U.S retail 5. Digital content
sales. About two-thirds of that ($19 billion) was spent by
merchants, with 60 percent of those dollars spent managing 6. Products easily converted to cash (like gift cards)
chargebacks, not outright liability. Just over 60 percent of Visa gets ball rolling
$12 billion in chargeback costs incurred by card issuers
in 2017 was associated with liability for credit, debit and Changes to chargeback rules and procedures are not
prepaid card chargeback claims, according to Javelin. new. At least once a year, Visa, Mastercard or both release
new or revised regulations related to chargebacks,
Chargeback management costs arise primarily from the Marchand noted. But over the past year, the card brands
litigious nature of the chargeback resolution process, have introduced major changes, many of which target
which pits cardholders (as plaintiffs) against merchants, ecommerce and other card-not-present merchants.
who must either plead guilty (accept chargebacks), or
present information defending themselves against claims. The Visa Claims Resolution (VCR) initiative, which took
Issuers have the final say (effectively sitting as judge effect in April 2018, was the first big change. The initiative
and jury) unless the merchant loses, in which case the seeks to streamline and modernize the dispute resolution
merchant can arbitrate through the card brands. process to be more reflective of modern channels of
commerce, to discourage frivolous dispute claims and
Although chargebacks can be legitimate, fraudulent thwart fraudulent claims. It includes new automated tools,
chargebacks have become a worsening problem. ClearSale, new dispute categories, the consolidation of 22 reason
which specializes in fraud prevention and chargeback codes into four, shorter allowable response times, and new
management services for ecommerce merchants, estimates procedural requirements.
that 86 percent of chargebacks are probable cases of
"friendly fraud," and these cases have increased 41 percent One new tool uses rules-based models to automatically
over the past two years. What's more, the firm said its data assign liability for chargebacks when possible, thereby
suggests roughly 40 percent of consumers who commit reserving only the most complicated claims for human
friendly fraud by filing bogus claims will do so again intervention. "It creates a more positive experience and
within 60 days. makes it harder for people to game the system," Marchand
said of VCR.
Some chargeback frauds are inadvertent, as when a
cardholder disputes a payment rather than seeking a Visa said VCR will benefit merchants "by reducing some
refund from the merchant. Other so-called friendly fraud of the friction that exists within dispute processing,
involves legitimate transactions that cardholders dispute eliminating errors and erroneous submissions (which
to avoid paying for items purchased, for example, because could reduce dispute volume by approximately 14 percent)
they're suffering from buyer's remorse or because someone and providing quicker resolution for disputes." Back in
else in the household used their card without permission. 2017, Visa said, the typical chargeback dispute took 46 days
Friendly fraud has become a major headache for merchants to resolve; the most contentious cases took over 100 days
that sell through digital and other remote channels. Javelin to resolve. The expedited resolution process ushered in by
estimates that friendly fraud is 34 percent more prevalent VCR aims to slash to 31 days the time it takes to resolve
with these merchants. most disputes.
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