Everything You Want to Know About Chargebacks

In today’s world, it is impossible to do any kind of business without accepting credit cards. They are an inevitable part of doing business today. The problem is that credit card numbers can be used fraudulently. More than $8 billion is lost to the United States economy each year as a result of credit card fraud. In 2014, 54% of all data breaches involved identity theft. Nearly 17% of these cases involved people trying to gain access to someone’s financial information and another 11% were looking for access to account information. Nearly one billion data records were compromised by data breaches in 2014. Globally that meant there were at least 1,540 data breaches, an increase of 46% from 2013. Given all of that, it not surprising that many companies worry about chargeback credit card fraud.

What are chargebacks?

Chargebacks refer to what happen when a customer challenges a charge on their credit card statement. The issuing company refunds the money on a conditional basis as they review the case. In most cases when a customer challenges something they found on their credit card statement, they have valid reasons for doing so. They may not have received an item they bought or really not recognize a charge on their bill. The credit card chargeback process was instituted to protect customers.

Chargeback credit card fraud evolved as people saw they could gain from this protection. There is a saying, “where there is a will, there is a way.” Almost as soon as credit cards gained popularity and began to be used all of the time, they developed ways to take advantage of the system. Chargeback credit card fraud describes how people take advantage of the protections credit cards offer them to get goods and services for free.

Credit card chargebacks in the United States were made possible by the Truth in Lending Act of 1968. It was not until 1974 when the Fair Credit Billing Act was enacted that credit card chargebacks were created. For the first time, credit card holders had the right to dispute charges on their credit card statements. The right was expanded to include debit card holders in 1978 when the Electronic Fund Transfer Act was signed into law by President Jimmy Carter. As bad as chargeback credit card fraud can be for merchants, these laws represent positive steps forward for American consumers. Every country has its own laws, rules and regulations dealing with chargebacks. One common denominator is that they all offer the consumer the right to call into question any charge they find on their credit card statements.

The chargeback process was developed to address a real need. Consumers needed protection from unauthorized use of their credit cards. When they first started to be used widely, it was much easier to use them fraudulently. It was not long before people discovered loopholes in the system and learned to exploit them to commit chargeback credit card fraud. Unfortunately, it will most likely take changes to be made on an industry-wide level to standardize the rules and regulations for chargeback credit card fraud to be eradicated.

Chargeback credit card fraud is a very clear cut example of an unintended consequences. When the chargeback process was developed, it was to protect consumers from the misuse of their financial information and credit cards. The people who wrote the rules and regulations that govern chargebacks could not have envisioned the concept of friendly fraud when they set out to create these protections for consumers.

As e-commerce was created and developed and took off in terms of popularity, the number of incidents of chargeback credit card fraud have exploded. This kind of shopping was not possible back when the chargeback was created because the internet itself was still decades away. Fraud detection policies and techniques have not been able to come close to keeping up with people who commit chargeback credit card fraud.

The vast majority of people who use their credit cards to buy goods and services do so legally and do not commit chargeback credit card fraud. There are ways companies can prevent some of it but until those industry-wide changes are made, it will continue to be an issue for many businesses.