What are the Consequences of Filing a False Chargeback?

When one makes a purchase using a credit or debit card, that person enjoys certain consumer protections offered by card networks like Visa and Mastercard, along with the bank that issued the card. One of the primary protection mechanisms is the chargeback.

A chargeback is a kind of forced bank reversal. The process was first introduced in the 1970s, as mandated by US law. For many years, the process worked just fine; the system was not prepared for the introduction of eCommerce, though, and that’s created problems.

Now, more and more consumers file chargebacks without a valid reason to do so. This has immediate consequences for businesses, but can negatively impact the cardholder, too.

The “Litigation-Based” Process

When one files a chargeback on a transaction, the person is essentially making a claim that the purchase is invalid for one reason or another. Some legitimate reasons to do this include:

• The purchase was fraudulent
• The goods or services weren’t as described
• The goods or services never arrived
• The seller charged the incorrect amount for the purchase

If the cardholder has a legitimate reason to dispute a charge, it’s that person’s responsibility to first contact the merchant, and try to resolve the situation through the proper customer service channels. If unable to resolve the matter, the cardholder may then elevate things by contacting the bank.

The chargeback process is sometimes described as “litigation-based.” It essentially works like a court case; the cardholder (the plaintiff) makes a claim against the merchant. The merchant (the defendant) must then provide evidence to try and validate the original sale. The bank serves as a judge, evaluating each party’s case, and resolving the dispute.

The Problem with the Chargeback Process

The chargeback process is time consuming. It sometimes takes weeks, or even months, to resolve a dispute based on the situation. That aside, the process can work more or less as it was intended. The realities of the eCommerce market, though, complicate things.

An issuing bank represents their cardholders, while also serving as an impartial mediator during a dispute. The bank has an incentive to keep cardholders happy, so it’s as if the judge and the prosecutor in a trial are the same person. The merchant is, in effect, “guilty until proven innocent.”

Distance, and a less-personal relationship between buyers and sellers, is a natural part of eCommerce when compared to brick-and-mortar. As a result, customers can be incentivized to file chargebacks without as much consideration and due diligence. The bank, for their part, mostly accepts these disputes to try and appease customers.

Consequences for Chargeback Abuse

“Friendly fraud” describes a situation in which a cardholder files a chargeback without a valid reason. It may be an honest mistake, or it could be deliberate abuse. In either case, there could be consequences for the cardholder if abuse is identified.

• Loss of Funds: The bank will uphold the original transaction, allowing the seller to keep the funds from the sale. Even if the cardholder might have been able to request a merchant refund beforehand, that option is no longer available.
• Blacklisting: The merchant may blacklist the cardholder, leaving them unable to make any additional purchases.
• Loss of Banking Support: If abuse is serious enough, the bank may judge the cardholder to be too much of a liability, and close the customer’s account.
• Damage to Credit Score: Credit reporting agencies will take note if a cardholder loses banking privileges, especially if it increases the person’s credit utilization ratio. This will hurt the person’s credit score, making it harder to open future lines of credit.

Of course, there’s also the simple matter of merchant costs to consider. When chargebacks hit merchants, it increases their costs, shrinking their profit margin. If the problem becomes a sustained issue, the seller could be forced to raise prices, impacting consumers as a whole.

Chargebacks are an important consumer protection tool. They must be handled carefully, though. If abused, chargebacks can become a costly problem for businesses and merchants alike.