EMV: New Tech Reveals Existing Problem

In the grand scheme of things, the transition to EMV technology is still in its infancy. It hasn’t even been a year since the liability shift took effect and brick-and-mortar retailers from Wal-Mart to your local coffee shop have experienced measurable changes.

Unfortunately, it’s not the kind of changes for which we had hoped.

Bringing Chargebacks to the Forefront

The liability shift of October 2015 meant that for the first time, the merchant would bear responsibility for card-present transactions reported as fraudulent. Before the EMV liability shift, if a cardholder reported a card present counterfeit transaction, the issuer absorbed the losses and didn’t submit a chargeback. Because it was their (the issuer’s) liability.

Now with the liability shift, issuers are sending in chargebacks. And boy, are merchants seeing those chargebacks roll in. From Q3 to Q4 2015, the SMB market alone saw chargeback rates soar nearly 31 percent.

And just like that, chargebacks went from relative obscurity to presence on the radars of the largest retailers in the world.

Waiting for the ‘Tipping Point’

Seeing these EMV-related chargebacks come through for the first time is understandably jarring for merchants. But making matters even worse, it’s not just the liability-shift causing the increase in chargebacks.

Other countries that have implemented EMV technology, and thus a liability shift, see increases in counterfeit fraud until the volume of chip card users and working chip card readers reaches a large enough volume. Basically, once chip readers are the ‘norm,’ fraudsters won’t be able to go to a merchant without a chip reader.

Visa describes this as the chip-on-chip ‘tipping point’. By all accounts, were still a ways off from reaching it.

Card Networks Respond

By late June of 2016, the major card networks each announced temporary changes to their respective chargeback policies aimed at easing the ever-growing burden placed on merchants. Visa, MasterCard, and American Express each announced within a week of one another sweeping, but temporary, changes.

Among the changes listed, Visa and American Express will block all U.S. counterfeit fraud chargebacks under $25 through April 2018. In addition, issuers will also be limited to charging back 10 fraudulent counterfeit transactions per account, and will assume liability for all fraudulent transactions on the account thereafter.

Merchants Respond (With Lawsuits)

The changes made by Visa, MasterCard, and American Express were a welcome relief to merchants. However, the changes didn’t address the struggles in terminal certification that merchants are experiencing.

Two separate sets of lawsuits, alleging violation of the Sherman Antitrust Act and the Clayton Antitrust Act, have been filed against credit card companies and issuing banks by merchants, both large and small.

The class action lawsuit filed on behalf of a number of plaintiffs focuses on the use of PINs, terminal certification, and chargebacks. These small merchants claim the credit card companies were unfairly forcing chargebacks upon them with the arduous terminal certification process.

Just as alleged in the lawsuit filed by large retailers, merchants were not able to insist on PIN use for chip-enabled cards. Resulting in unavoidable chargebacks.

EMV technology might be still in its infancy, but the problem revealed is not new. Chargebacks happened long before the shift to EMV in the United States, and will continue long after we reach the ‘tipping point’.