CEO Insights: Are chargebacks helping or hurting EMV adoption?

Last week we discussed the current state of EMV adoption in the United States. Today, more than a year past the original October 2015 liability shift, there is still plenty of work to be done. Confusion over the best course of action still lingers among some software developers and merchants. For many, the entire topic of EMV is disheartening. While market-ready solutions do exist (see Creditcall’s lineup of EMV Kernels and Payment Gateway Features), some companies are mired in integration challenges. Then, of course, there’s the certification process that can take months. In addition to these factors, there’s another trend affecting EMV adoption — chargebacks. At one time, chargebacks were an effective “stick” being used to hasten adoption. However, recent changes to chargeback rules might be playing a role in an EMV slowdown.

As the liability shift passed, merchants started getting hit with chargebacks over and above what they experienced in the past. Prior to the liability shift, issuers were able to detect probable fraud on disputed transactions, and — knowing they were liable for crediting the cardholder — they did not bother to process chargebacks. The issuers felt it would be a waste of time and money, as it’s very costly for them to process chargebacks in addition to the actual transaction loss itself. As a result, there were billions of dollars’ worth of fraudulent transactions not reported to merchants even though refunds were being issued to consumers. After the liability shift, the issuers had a valid business case to pass these chargebacks to the merchants.

One report estimated there have been 260.3 million chargebacks worth $5.8 billion so far this year, reflecting a 17 percent increase in transactions and 21 percent more dollar value than in 2015

Today, now that larger merchants have secured their payments infrastructure, SMBs are being targeted by criminals and fraudsters. One report estimated there have been 260.3 million chargebacks worth $5.8 billion so far this year, reflecting a 17 percent increase in transactions and 21 percent more dollar value than in 2015. Merchants have responded to this jump in chargebacks with lawsuits, which are expected to increase into 2017.

To ease frustrations, a few months ago Visa and Mastercard modified their policies to limit the number of chargebacks. The new and relaxed rules for chargebacks say that transactions less than $25 (corresponding to 40 percent of chargebacks and 15 percent of total chargeback value) cannot be included in the chargebacks, and they set a limit of max 10 transactions per card as a part of a chargeback.

We’ve seen some actual merchants that face tens of thousands of dollars in daily chargebacks. With the recent relaxation of the rules to no longer include amounts less than $25, chargebacks will be reduced but will still be very significant for many merchants.

Interestingly, this chargeback adjustment might have slowed down EMV adoption. Ingenico adjusted its growth number down and Verifone is showing a revenue decline last quarter. Both companies state that the relaxing of the chargeback rules has caused a slowdown in the deployment of new terminals. It’s possible that they are correct, but it’s also possible that their decline is due to an inventory buildup unrelated to chargeback rules.

It’s debatable whether chargebacks are an effective way to encourage EMV adoption or whether the rules adjustment is negatively affecting the rate of adoption. It’s unfortunate that we even have to discuss chargebacks when there are EMV solutions available today that can immediately address the needs of merchants. Software developers and merchants looking to address payment security quickly and painlessly can contact our offices to learn more. Take action today and let the card issuers and fraudsters focus on other merchants.

Insights from Lars Pedersen, Creditcall CEO.