You\u2019ve undoubtedly had a charge on your credit card statement that was hard to decipher.<\/p>\n\n\n\n
Perhaps you squinted real hard to parse the merchant\u2019s name and even called the listed number to figure out what the charge was for.<\/p>\n\n\n\n
Or maybe you\u2019re the other 99.999999% of card-owning Americans and you said \u201cI ain\u2019t paying for this,\u201d and you clicked a button in your bank portal and immediately had the disputed funds credited back to your account.<\/p>\n\n\n\n
Don\u2019t get us wrong, there are legitimate reasons to charge back unauthorized transactions.<\/p>\n\n\n\n
But today\u2019s chargeback has become:<\/p>\n\n\n\n
There once was a time when you would call the issuing bank and they would bring in the merchant to amicably resolve the issue. <\/p>\n\n\n\n
Not anymore, baby.<\/p>\n\n\n\n
To show you how ridiculous this all is we tapped Jason Kafer<\/a>, founder of Payments Therapist<\/a>, and one of the few that understand this industry at its core.<\/p>\n\n\n\n We need to begin with the basics.<\/strong><\/p>\n\n\n\n A chargeback is a mechanism the card schemes codified to protect cardholders from, for lack of better terms, fraud and misrepresentation.<\/p>\n\n\n\n Fraud is somewhat obvious: someone stole your credit card and started buying things you never approved.<\/p>\n\n\n\n Misrepresentation is a little more complicated. <\/p>\n\n\n\n A more straightforward example of misrepresentation would be that you ordered a sweater in size Medium, received a size Large, and the merchant isn\u2019t permitting a refund despite clear return policies that entitle you to a refund.<\/p>\n\n\n\n Towards the ambiguous end of the spectrum: you hired a contractor to paint your house, the contractor painted your house, you didn\u2019t like it – who knows why – so you charge back the whole job. <\/p>\n\n\n\n In reality the biggest risk for a large volume of chargebacks are affiliate programs<\/a>, as Jason points out in his own article. <\/p>\n\n\n\n All of these chargeback scenarios have reason codes<\/a> that are intended to highlight the basis for the chargeback. <\/p>\n\n\n\n While this may have been well intentioned when it started – and certainly helped the card duopolies build their standing, so don\u2019t mistake it for charity – it\u2019s become yet another example of the entire payments ecosystem cornholing the poor merchant.<\/p>\n\n\n\n The issuing banks, who represent the cardholder, make so much money on interchange<\/a> that they bend over backwards to keep cardholders.<\/p>\n\n\n\n It\u2019s common for banks to instantly issue a provisional credit to the cardholders account, particularly in an ecommerce transaction<\/p>\n\n\n\n Jason Kafer<\/p>\n<\/blockquote>\n\n\n\n That\u2019s because the issuing bank doesn\u2019t want to be on the hook for any amounts owed to the merchant and broadly markets zero fraud liability to prospective cardholders. <\/p>\n\n\n\n Go look how easy it is to initiate a dispute on your own banking platform.<\/p>\n\n\n\n Here\u2019s what happens when a chargeback is filed.<\/p>\n\n\n\n The cardholder issues a dispute. The issuing bank, which represents the cardholder, sends the dispute to the acquiring bank, which represents the merchant.<\/p>\n\n\n\n The merchant\/acquiring bank must submit satisfactory evidence to the issuing bank per the card scheme\u2019s dispute guidelines<\/a>. <\/p>\n\n\n\n The issuing bank then reviews the evidence. <\/p>\n\n\n\n If they don\u2019t find the evidence satisfactory, they deny the dispute, at which point the next step is Arbitration.<\/p>\n\n\n\n Let\u2019s stop here for a second.<\/p>\n\n\n\n And this is for high integrity MCCs, like medical, where the services were clearly rendered.<\/p>\n\n\n\n Why so low?<\/p>\n\n\n\n Because the issuing banks set the acceptance rules. <\/strong><\/p>\n\n\n\n Just because the merchant submits the precise data called for by the card schemes doesn\u2019t mean the issuing bank has to accept dick. <\/p>\n\n\n\n Off to the bank\u2019s offshore contractor whose mantra is \u201creject immediately and dare them to fight us.\u201d<\/p>\n\n\n\n For instance, in an ecommerce transaction the use of 3-D Secure (think Apple Pay) is supposed to provide enough security that the issuer can\u2019t refute the merchant\u2019s chargeback, shifting liability<\/a> to the issuer\u2026 but that\u2019s only if you, you know, follow the networks\u2019 rule books. <\/p>\n\n\n\n Which nobody does.<\/p>\n\n\n\n Including the networks themselves. <\/p>\n\n\n\n Arbitration, fortunately, does involve the card networks, so if the submitted evidence meets the card scheme\u2019s requirements there\u2019s a higher probability that the dispute will be ruled in the merchant\u2019s favor.<\/p>\n\n\n\n But guess what?<\/p>\n\n\n\n Arbitration costs <\/strong>$500 for the merchant, and $500 for the cardholder<\/strong><\/a> (issuing bank). <\/strong><\/p>\n\n\n\n And no, you don\u2019t get that money back.<\/p>\n\n\n\n How many transactions are worth spending $500 for a chance at the slot machine?<\/p>\n\n\n\n You\u2019re talking about transactions in the thousands or tens of thousands of dollars before the math will pencil.<\/p>\n\n\n\n Frankly, the Arbitration process should mirror English Rule<\/a>, where the loser pays the winner\u2019s fees in addition to their own. <\/p>\n\n\n\n Jason has seen some real abuses of the system.<\/p>\n\n\n\n Try this one on for size.<\/p>\n\n\n\n A cardholder spends big money on a bar tab. <\/p>\n\n\n\n After he\u2019s unquestionably consumed all the liquor and sobering up the next day, he looks in his bank account and realizes he\u2019s spent way more money than he had.<\/p>\n\n\n\n And rent is due.<\/p>\n\n\n\n So naturally he issues a chargeback.<\/p>\n\n\n\n Cuz \u2018Merica. <\/p>\n\n\n\n The cardholder gets the money back – almost instantly – and then he spends the money on rent.<\/p>\n\n\n\n Of course the merchant\u2019s getting boned, and they rightfully submit evidence to counter the dispute: video footage, receipt signature, the works. <\/p>\n\n\n\n Well, the issuing bank looks at the cardholder\u2019s balance and realizes that if they award the funds back to the merchant, the cardholder will have a negative balance and get hit with an overdraft fee.<\/p>\n\n\n\n Can\u2019t lose a cardholder now: we make way too much money on interchange for that.<\/strong><\/p>\n\n\n\n So the issuing bank rejects the evidence knowing that the odds of the merchant going to Arbitration are slim-to-none.<\/p>\n\n\n\n Here\u2019s another one.<\/p>\n\n\n\n An Amex cardholder goes to the bar and the Amex is declined at checkout. <\/p>\n\n\n\n The cardholder calls Amex and Amex gives the merchant a 6-digit voice authorization code that allows for a forced settlement through the terminal, meaning that the merchant will get a settlement in their bank without a corresponding Amex authorization.<\/p>\n\n\n\n The merchant gets their money so they\u2019re happy.<\/p>\n\n\n\n The cardholder does this month after month, clearly indicating that he doesn\u2019t have the funds to be at the bar, but when did financial prudency ever stop Americans from spending money?<\/p>\n\n\n\n One day the merchant notices that tens of thousands of dollars have been withdrawn from his bank account by Amex.<\/p>\n\n\n\n Why?<\/p>\n\n\n\n The Amex cardholder was behind on bills, and Amex – by virtue of sending the bar authorization codes which are NOT processed as EMV transactions – realized that they could simply issue a chargeback and recoup all monies spent by the cardholder within the past 540 days (Amex has now capped this to 120 days, but of course they set the rules).<\/p>\n\n\n\n Is it legalized theft?<\/p>\n\n\n\n Not according to chargeback \u201crules\u201d.<\/p>\n\n\n\n But in the court of morality?<\/p>\n\n\n\n 100%.<\/p>\n\n\n\n Outside of the direct costs of each chargeback, here\u2019s why chargebacks matter: <\/p>\n\n\n\n If a merchant receives a high percentage of chargebacks, the card schemes can prevent the merchant from processing in the future.<\/strong><\/p>\n\n\n\n Mastercard puts these merchants on the MATCH list<\/a>, and Visa\u2019s list is called TMF.<\/p>\n\n\n\n According to Jason, nearly everyone just takes Mastercard\u2019s MATCH list as the source of truth.<\/p>\n\n\n\n The intent of these lists is to prevent bad actors from remaining in business and fleecing more cardholders.<\/p>\n\n\n\n And being on the lists is expensive.<\/p>\n\n\n\n While Visa is changing their high risk program (future article on VAMP<\/a> incoming) here\u2019s how the networks have viewed chargebacks in broad strokes.<\/p>\n\n\n\n In reality, most merchants never make it this far. The sponsoring bank is on the hook and is supposed to be diligently overseeing their acquiring programs, and having merchants make it to the MATCH list just invites extra scrutiny.<\/p>\n<\/blockquote>\n\n\n\n Jason clarifies that the networks choose to do a minimum number of bank audits annually, and they\u2019re painful. If you\u2019re a bank who has chargeback issues, guess who\u2019s making it to the top of the audit list?<\/p>\n\n\n\n Sounds like being on the MATCH list is bad, right? Can\u2019t process card payments anymore, which is definitely inconvenient. <\/p>\n\n\n\n But you know how duopolies think: never let a crisis go to waste.<\/p>\n\n\n\n Especially when you control everything.<\/p>\n\n\n\n Enter RDR, or Rapid Dispute Resolution.<\/p>\n\n\n\n If you don\u2019t know about RDR, you\u2019re going to love this.<\/p>\n\n\n\n Imagine you\u2019re a merchant that operates in a gray legal area, like nutraceuticals. <\/p>\n\n\n\n You get a lot of chargebacks. So much so, that you\u2019re at risk of getting placed on the MATCH or TMF lists.<\/p>\n\n\n\n But your acquiring bank wants to keep you off that list because they\u2019re making a killing on your account, classifying you as a \u201chigh risk<\/a>\u201d merchant and probably clearing 500 bps of margin on every dollar through your business.<\/p>\n\n\n\n You obviously want to stay in business and are generally in a line of commerce that\u2019s highly profitable (nutraceuticals are a 40% margin business<\/a>, for example).<\/p>\n\n\n\n Under RDR, your acquiring bank will work directly with the issuing bank of a cardholder that issues a chargeback to settle the matter off Visa and Mastercard\u2019s radar, so you can keep accepting cards.<\/p>\n\n\n\n This protocol, called the Chargeback Dispute Resolution Network (CDRN), was invented by Ethoca<\/a> and Verifi<\/a>, and for $45 a merchant could relinquish the disputed amount but would avoid the black eye of a chargeback.<\/p>\n\n\n\n And if you went to those links you probably noticed that Ethoca is now owned by Mastercard, and Verifi now owned by Visa.<\/p>\n\n\n\n Chargebacks = bad. <\/p>\n\n\n\n But pay $45 and the networks are happy to look the other way.<\/p>\n\n\n\n See, the card duopolies don\u2019t actually care about stopping \u201cscumbags and evil-doers\u201d from conducting business and hurting cardholders: they care about being duopolies.<\/p>\n\n\n\n\n
In combing through chargeback data, we\u2019ve seen fewer than 4% of disputes resolved in the merchant\u2019s favor on the first pass.<\/strong><\/h4>\n\n\n\n
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