History of Chargebacks

Why Were Chargebacks Created?

The history of chargebacks is pretty straightforward; however, the current use of chargebacks is quite different from lawmakers’ original intention. Find out how the history of chargebacks has evolved into friendly fraud.

The Fair Credit Billing Act

The history of chargebacks as a consumer right is traced back to the US Fair Credit Billing Act of 1974. Developed to protect consumers from deceptive merchants who wrongfully charge credit and debit cards for nonexistent or falsely presented goods and services, chargebacks allow customers to deal directly with their card provider in order to dispute unlawful credit and debit charges.

Issuing banks are enabled to issue the reversal of a previous transaction made on a cardholder’s credit or debit card account, in the event that the cardholder’s chargeback claim is proven legitimate. In order for this to be proven, the chargeback must be approved by the banks and card network involved in the initial transaction.

Merchants are given the ability to dispute the claim, declaring the legitimacy of the original purchase and vowing the delivery of all promises regarding the purchase. If the merchant does not respond to the dispute within the allotted time period, does not respond adequately, or does not respond at all, the chargeback is automatically awarded to the cardholder.

Billing Errors

Chargebacks were designed to add a level of security for customer’s transactions when using credit or debit cards. In order for a chargeback to be processed, the transaction must be what is referred to as a “Billing Error”.

However, this is where things get tricky. Not everything you may encounter will qualify as a billing error. On the flip side, customers have found ways to manipulate the situation so that their transaction does qualify.

Billing errors under the FCBA vary from credit card purchases conducted by an unknowing family member, to an inaccurate description of the product or service ordered.

Specified billing errors include:

  • Unauthorised charges for a product or service
  • Charges made by someone other than the cardholder
  • Charges for an amount different from what was originally agreed upon
  • Services or items weren’t delivered

According to the FCBA, the following are also considered billing errors under federal law:

  • “A computation error or similar error of an accounting nature of the creditor on a statement.”
  • “A reflection on a statement of an extension of credit for which the obligor requests additional clarification including documentary evidence thereof.”
  • “The creditor’s failure to reflect properly on a statement a payment made by the obligor or a credit issued to the obligor.”

If a consumer attempts to file a chargeback for a reason that does not qualify as a billing error, their issuing bank might encourage them to contact the merchant involved directly in order to resolve the issue.

The presence of a billing error is not the only rule that must be followed in order for a chargeback to be legitimate. However, banks don’t always abide by the applicable rules.

Consumer Protection Turned into Friendly Fraud

While the history of chargebacks is to protect consumers, they have morphed into a merchant punishment. Consumers are using chargebacks to secure illegitimate returns.

Rather than contact the merchant for a refund, cardholders request a chargeback from the bank. These chargebacks are not what was originally intended with the passing of the Fair Credit Billing Act in 1974.

Consumers have learned how to cheat the system and get a quick, no-hassle refund. As a result, merchants are suffering from profit loss and severe chargeback fees.

The indicators of friendly fraud are often difficult to identify since the act is committed by seemingly satisfied customers. This makes detecting friendly fraud more challenging—but not impossible.

Get Help Now!

Have you witnessed first-hand the history of chargebacks as they’ve evolved from consumer protection into friendly fraud? If you are suffering from illegitimate chargebacks, it is time to fight back. Disputing friendly fraud means recouping profits you never should have lost.

Let us know if you’d like help preventing and disputing friendly fraud chargebacks!