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Merchant credit card chargebacks – Is EMV the holy grail?

October 6, 2019


When a cardholder detects a fraudulent transaction in their statement, he or she files a complaint with the issuing bank. Issuing bank then investigates the transaction and if it is found fraudulent,  the bank will refund the original value to the cardholder. If the merchant fails to prove that the transaction was legimitate, the bank will take back the entire value of the transaction along with an additional fee for chargeback.

In these situations, the merchant stands to lose the sold products or services, the payment, transaction fee, chargeback transaction fee, and even commissions on currency conversions. Hence, it is imperative that merchants try and avoid all chargebacks. If there are too many chargeback requests from a merchant, then they would be labelled as risky, resulting in higher transaction commissions and holding of remittances for about 3 months to ensure safety of customer transactions.

There are many reasons for a chargeback that includes fraudulent transactions, credit not processed, item not received, and other technical problems. Since 2015, the liability for the chargebacks lie with the merchants in the US, if they have not migrated to EMV.

There were major roadblocks in EMV migration, especially in the US as the acceptance infrastructure was not certified for EMV. This prevented the merchants from accepting chip card payments.

EMV Certification and deadline extension – breather to merchants

Major card brands like MasterCard, Visa, Amex, and Discover decided to help the merchants by streamlining the certification process, in addition to implementing chargeback limits to provide relief to merchants.

The merchants in the US got breathing space to move to EMV till April 2018, as the payment brands took away the liability shift from merchants for chargebacks under $25 and limited the number of chargebacks to 10 transactions per card accounts.  In addition, these major card brands in the US moved their automatic fuel dispenser EMV activation to October 2020 from October 2017.

Card brands have collectively been simplifying the process of EMV terminal testing and certification, in order to speed up the chip migration.

Is EMV the one-stop solution to fraudulent transactions?

Fraudulent transactions aren’t going to go away but EMV is probably the first step towards eliminating fraud – this would at least keep the not-so-sophisticated fraudsters out of the mix.

It is very imperative that merchants of all sizes migrated to EMV to reduce fraudulent transactions and to cut out the liability of chargebacks. Chargebacks can literally have a huge impact on businesses.

How to complement EMV – case example

Nowadays, chargebacks are coming even for EMV transactions especially in the offline mode. This means it is necessary to substitute or complement EMV to enhance transaction security.

Take the Indian scenario, where we have indigenous home-grown substitutes for EMV transactions. National Payments Corporation of India (NPCI) and Indian Government has come up with payments through biometric authentication, using unique identity number, Aadhaar. This is called Aadhaar Enabled Payment System (AEPS), where account to account transactions happen using biometric authentication of the remitter. The possibility of chargeback is absolutely zero in this case.

NPCI has also come up with revolutionary Unified Payment System (UPI) where money can be transferred through the UPI mobile app or dialling USSD *99# using Virtual Payment Address (VPA), Mobile Number, QR code, or AADHAAR Number. Transaction is authenticated using UPI PIN, MPIN and also with AADAHAR biometric authentication. This ecosystem has almost zeroed down chargebacks. Even Samsung Pay has launched UPI recently in India.

While EMV is a good starting point, it is time that other countries also try to complement EMV, in order to reduce chargebacks by leveraging biometric or UPI technology.

Indranil Chakraborty

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