However, in most cases it won’t be the consumer who has to pay when a fraudulent transaction is made. Instead, it will most likely be the card issuer or the merchant due to policies they have known as zero liability. This means that, if someone is the victim of fraud, they will be reimbursed. Even so, the Fair Credit Billing Act limits the personal liabilities of a fraudulent transaction to $50. In most cases, card companies waive these fees, and will instead shoulder the cost themselves and reissue you with a new card.
In most cases, liability will be down to either the merchant or the bank. This will usually depend on whether the fraudulent transaction involved an actual card being presented – in other words, the criminal stole the card and put it into the card reader in the retail store – rather than getting hold of the details and handling the transaction online. Generally speaking, the bank will be more likely to pay for card present transactions while the merchant might get stuck with the cost for the card not present transactions.
With the number of these types of fraud growing hand in hand with the rise of ecommerce, this is creating a headache for merchants. Costs can come in the form of chargebacks, penalty fees, lost products and other measures.
Here’s what happens when fraud is suspected.
- The customer will spot a transaction they don’t recognise and contact their card issuer.
- The card issuer will issue a temporary refund and will investigate the transaction.
- Disputed funds will be withheld from the merchant until the dispute has been resolved.
- You can either accept the chargeback or dispute it. If it’s the latter, you will have to provide documentation which proves the transaction was genuine, such as receipts and customer correspondence. This can all add to the operational costs to your business.
- The card provider will make a decision. If they find in favor of the customer, the disputed funds will be returned to them.
Chargebacks are becoming an increasingly expensive problem for businesses. Chargebacks represent a $40bn cost to merchants. Costs can be both direct and indirect.
Direct fees can range from $10 to $150 per order and flat rate penalties. Indirect costs may include reversal of transactions, lost products, cost of shipping and processing product returns. You may also have to pay a penalty to the payment processor and, if you have a lot of chargebacks on your account, you may be put into a chargeback monitoring program which will place you under extra scrutiny until chargebacks reach what the payment processor deems to be an acceptable level. According to the site Chargebacks.com, the direct cost of each $100 worth of chargebacks could amount to $240. With fraud on the rise, these represent a growing threat for businesses.