Safeguarding Your Retail Franchise from Chargeback Fraud



As we enter the third decade of the 21st century we move further towards what has been dubbed a ‘cashless society’. For consumers, card transactions provide a simple payment option that doesn’t require them to lug around spare change, and thanks to new technologies has become increasingly more secure.

But with more customers paying by card than ever before, it is important that retailers across the sector understand how the various laws and policies may impact their business.



In 2018 two of the biggest card providers, Visa and MasterCard changed their transaction dispute policies to streamline the process for which a customer can dispute a transaction. Subsequently, the various financial institutions that issue these cards – banks, credit societies etc. – changed their rules for disputed transactions to conform with Visa and MasterCard’s new policies.

In a nutshell, this has resulted in the bulk of financial institutions now accepting at face value any unauthorised claim by a cardholder regarding an online transaction. Whereas previously a retailer was advised that a transaction was disputed before any reversal occurred, now an institution will initiate a chargeback with immediate effect and automatically deduct the relevant amount of money from the retailer’s financial account.

The rationale behind this rule change was sound enough. Visa and MasterCard wanted to make it easier for customers who have genuinely had their card scammed to receive quick recourse.

However, this well-meaning reform has brought with it a raft of unintended consequences that impact retailers. Feedback that the NRA has received from industry is that there has been a noticeable increase in the number of customers purchasing goods online, receiving the goods and then disputing the transaction.

Financial institutions and card issuers simply taking customers ‘at their word’ has allowed a small minority of people to manipulate the system so that they receive both the purchased item and their money back. There have even been reports of customers returning their purchase to receive a refund, only then to receive an added reimbursement by disputing the transaction and thereby effectively receiving a ‘double refund’.

Given that most financial institutions no longer provide advanced notice to a retailer about a deduction, affected businesses can be left with a significant difference between their sales records and their bank accounts. This presents an even greater challenge to smaller retailers who require sufficient levels of cash flow to remain solvent.

So, what can retailers do to safeguard themselves from the small number of unscrupulous consumers manipulating the new rules?

First thing is to understand that since a business’s relationship is with the financial institution, and not the card issuer, it is the bank who a retailer should go to for any dispute against a chargeback.  Respective institutions have different policies on how these disputes are processed. This includes different rules regarding the timeframe in which a business can lodge a dispute or the number of disputes that can be challenged in a specific period. It’s therefore vital that all retailers contact their bank regarding their rules for challenging a chargeback and compare which institutions offer the most flexible policy in this area.

The second, and perhaps most important, way for retailers to combat refund fraud is to be able to identify a chargeback on financial statements. Again, different institutions denote chargebacks in different ways, but generally transactions recorded as CBK, CBACK or of a similar code denote a chargeback. At the end of the day, it’s pretty hard to safeguard against chargeback fraud if you’re not even aware that it is occurring.

Understanding a financial institution’s dispute policy and being able to recognise a chargeback on a bank statement are all well and good, but what proactive steps can be taken to limit chargeback fraud from occurring in the first place?

It’s important that retailers can demonstrate to their bank that the ability to make a fraudulent online transaction is as low in likelihood as possible. Having a rigorous transaction process in place for purchases made via a webpage or an app greatly enhances the ability to curtail shoppers exploiting any refund loopholes. Moreover, someone will be less likely to target a business that has a thorough set of checks and balances due to a high probability of eventually being caught.

The most straightforward measure is for a retailer to, where possible, implement a two-tier verification for any online purchase. This is relatively easy to do and won’t impose a significant barrier to a consumer looking to make a purchase quickly. Alternatively, retail franchises should explore the secure payment facilities that are provided by card issuers such as Verified by Visa or MasterCard SecureCode.

Then there are of course also the traditional safeguards such as requiring the three digit CVV number recorded on each card for online purchases or if the transaction is made in store checking whether the customer’s signature corresponds with the one on the back of the card.

To be clear, from our experience it is only a miniscule number of dishonest people who have sought to rig the new set of rules. It should also be noted that there is certainly merit to Visa and MasterCard’s change of rules that seek to fast-track the process for customers who have become genuine victims of credit card fraud.

We’re confident that now that the loophole has been identified, that both the retail and banking sectors will work together to find a resolution that adequately balances the interests of consumers and retailers alike. However, in the meantime, retailers of all shapes and sizes need to take the time to safeguard their business from chargeback fraud.

Australian retail faced enough challenges throughout 2019 with low consumer confidence and stagnant sales. Seeing hard-earned revenue walk out the door due to dishonest transaction disputes is an expense all franchisees could do without.

The good news is that there are straightforward measures that can be implemented to combat the scourge of chargeback fraud and we implore all retailers in the franchising sector to take the appropriate steps to safeguard their business.



Dominique Lamb is the CEO of the National Retail Association, she has extensive experience providing industrial relations and employment law advice to a range of small, medium and large businesses across a range of industries

The National Retail Association is Australia’s largest and most diverse industry association. As a not-for-profit organisation. Its mission is to support, inform, protect and represent the interests of retailers and fast food businesses, providing advice on issues such as employment law, industrial relations, training information, workplace health and safety issues, event details, advocacy and policy updates, HR advice and migration and visa issues.