Credit cards are vulnerable to chargeback fraud

By Alexander Millman and Lindsay Carroll, NRA Legal

Members of the National Retail Association (NRA) are experiencing an increase in chargeback fraud following changes to the transaction disputation rules of major card providers.

In 2018, both Visa and MasterCard changed their transaction disputation rules to make the process of challenging a transaction more timely and cost-effective.

As these cards are issued by financial institutions rather than by Visa and MasterCard themselves, the various financial institutions (banks, credit societies etc.) also changed their rules relating to disputed transactions and chargebacks.

The impact of the changes

Because of these changes, the majority of financial institutions will now accept that a transaction made online (whether through a webpage or an app) was unauthorised on the say-so of the card holder.

Whilst previously merchants were advised that these transactions were disputed before they were reversed, the rules under which most financial institutions operate now stipulate that the transaction may be reversed with immediate effect, and the relevant amount of money deducted directly from the merchant’s financial account.

Where the fraud comes in

Because financial institutions and card issuers now take consumers “at their word”, NRA members have noticed an increase in customers paying for goods online, receiving the goods, and then disputing the transaction.

This means that the customer gets both the goods and their money back.

In some cases, NRA members have seen customers return goods for a refund before disputing the transaction, effectively getting a ‘double refund’.

The business impact

Because the financial institutions will deduct this money from a merchant’s bank account without advance notice, businesses can find themselves with a significant difference between their sales records and their bank accounts.

For smaller businesses in particular this can have significant consequences in terms of ensuring sufficient cash flow to remain solvent.

Defending against chargebacks

As your business’s relationship is with your financial institution rather than the card issuer (i.e. Visa, MasterCard etc.) it is your bank with which any dispute against a chargeback will need to be lodged.

The rules around these disputes vary across financial institutions, including the timeframe in which you can lodge a dispute and the number of disputes you can lodge in a given period. We recommend that you contact your financial institution for full details on the process for disputing a chargeback, and any limitations on your ability to dispute chargebacks.

Most importantly, make sure you can spot a chargeback on your financial statements. Different financial institutions denote merchant chargebacks in different ways, but generally any transactions labelled CBK, CBACK or something similar will be a merchant chargeback.

How to protect yourself

One of the primary means of protecting your business from chargeback fraud is to, where possible, require two-factor verification of any purchase made through your website or app.

Another option is to utilise the secure payment facilities provided by Visa (Verified by Visa) and MasterCard (MasterCard SecureCode).

It is important to make sure that you do not forget the more traditional methods of fraud prevention, such as ensuring that your online store captures the three-digit CVV number of the relevant card, or that where purchases are made in store with authorisation with a signature, that signature is checked against the signature on the back of the card.

Moving forward

The NRA is continuing to monitor this situation, and is looking into the prospect of discussions with the Banking Industry Association to see if the retail and banking industries can collaborate on a mutually workable solution.

In the meantime, if your business has experienced chargeback fraud, we would like to hear your story. Please email your details to using the subject line Chargeback Fraud or call 1800 RETAIL (738 245).