EMV & Chargebacks: What We Know So Far

An event started occurring in November 2015 that looked like it had the potential to hurt the vending industry. Operators started to receive chargeback fees on cashless transactions where an EMV® card — commonly known as a “chip card” — was used to pay on a non-EMV compliant device and later challenged. The chargeback fees were more than 10 times the cost of the product being purchased. Often there were fees for multiple transactions made using the same account number. One mid-sized operator showed me emails from his processor, with these fees, and wanted to know why.

Chargeback fees normally result when a credit-card provider demands that a retailer/merchant make good the loss on a fraudulent or disputed transaction. However, this operator had never received so many chargebacks in one month. The increase appeared directly related to the recent “EMV liability shift” which made merchants responsible for some chargebacks that had previously been borne by banks or card brands. The operator knew about the liability shift, but he had been told that it would have a small impact on his vending business.

So what happened? The answer, as it turns out, is complicated. None of the major card brands responded to multiple requests to comment. So we turned to industry experts who know the cashless arena and how this issue is affecting vending firsthand.

The problem is fees

First, Glenn Butler, general manager for Nayax North America and longtime industry veteran, wrote a blog for VendingMarketWatch.com explaining about how EMV had come to the U.S., thanks to a liability shift from card companies to retailers or banks if they did not offer an EMV card. “In fact, this October was considered the real EMV milestone for the U.S.,” said Butler. “The credit card processors have now switched liability for fraudulent credit and debit charges from themselves to banks and merchants if they do not offer EMV cards and card readers, respectively. That could include vending operators who do not have an EMV compliant card reader on their vending machine.” However, the potentially huge and unforeseen problem this liability shift caused was the issue of chargeback fees.

“I recently talked with a payment industry contact to fully understand the chargeback issue as it relates to EMV and vending,” said Butler. “He explained that when an EMV credit card used at a vending machine is later reported stolen, operators have to eat the transaction cost, which we knew. However, operators also get charged a ‘chargeback’ fee by the cashless processor. The fee is per transaction, not per card or customer.”

In his blog, Butler used the example of someone who buys 30 $1.50 items from a vending machine before the EMV card used is reported as stolen. This results in the operator paying not just the $1.50 for each of the products from the transactions, but also $25 per transaction for the chargeback, or roughly $45 in product costs and $750 in chargeback fees. “It’s a huge issue and just as real for micro market operators who do not have EMV compliant card readers on their kiosks,” said Butler.

These fees are based on a few assumptions; such as the card has an EMV chip and that the card reader is not EMV compliant. If the credit and debit cards used by the consumer don’t support EMV, then the liability and fees would go to the bank, not the operator. Also, Butler reports that the major credit card associations and banks are working on the issue, but that, as of the end of 2015, chargeback fees, in some cases, were significant. “I know of one vending operator who received $11,000 in chargebacks in one month and the liability shift that led to these fees only happened in October. We’ve barely scratched the surface of this issue,” said Butler in his blog.
Chuck Reed, CPI’s senior director — sales & marketing, vending Americas, commented that while CPI isn’t involved in helping operators establish merchant agreements where these chargebacks would be listed and negotiated, he was surprised to hear about the charges. “I don’t believe anyone anticipated such a high dollar amount,” he said.

Don’t panic about EMV

While the chargeback fee issue does exist, industry experts suggest that the impact may be limited to a small number of transactions. Also there’s hope that the problem may, in time, be alleviated. However, in the meantime operators may want to learn how to investigate and dispute chargebacks.

“Fraud on vending purchases has always been very low in the vending channel. Even after the liability shift, we’re not seeing a big uptick in chargebacks due to actual fraud,” said Justin Grant, vice president of products for Cantaloupe Systems. “However, we’ve seen a moderate increase in chargebacks due to mistakes made by banks in labeling legitimate transactions as fraudulent. In these cases, legitimate transactions were made on a card that was later cloned, lost or stolen. We’ve been helping our customers dispute these chargebacks.”

Grant admits that these observations are from a limited sample size as the liability shift is so new. Still, he has seen the problem firsthand. One of Cantaloupe’s customers, a medium-sized operator in the Midwest that generates about $1 million in annual cashless sales, got a $125 chargeback fee in his last statement. The chargebacks covered 5 transactions from one card number.

Using the Seed Cashless web application, the operator searched for transactions matching the supposedly fraudulent card number shown on his card processor’s merchant statement, according to Grant. The transaction history showed that this card was used at only one location and was used to buy the same products around the same time every day for several months before fraud was reported. Although the card account had been cloned, this transaction history showed that a real card (not a cloned card) was used to make those vending transactions before and during the period while the cloned card was also being used somewhere else. Clearly the bank that reported the fraud had lumped the legitimate vending transactions in with the illegitimate cloned-card transactions that happened at the same time.

“The operator then disputed these chargebacks with the processor, sending them an Excel export of the transaction history including dates, times, locations and products purchased,” said Grant. “This data clearly showed that this was the legitimate card being used consistently over time. The operator expects to get the chargebacks reversed.”

Grant offers the following takeaways for operators running non-EMV readers on vending machines:

• First, while the banking system gets used to the new liability shift, there will likely be more mistakes than usual as the humans and software that make up the banking system learn the new process. As the new system matures, bogus chargebacks like the one described earlier should happen less often. But for the next few months at least, operators should watch their processor statements carefully and expect that processors and upstream banks will send mistaken chargebacks.
• Second, just because an operator gets a chargeback doesn’t mean they have to pay it, argues Grant. Operators should learn how to dispute chargebacks. If the real card was used for a transaction, it’s not the operator’s liability. Ask your processor or your cashless provider for details about the dispute process.
• Third, cashless providers vary in the tools they provide to help an operator dispute chargebacks. Operators should make sure their cashless supplier provides reporting tools that make disputing chargebacks easier. Here’s what Grant suggests they look for:

The cashless system should be able to search for historical transactions using the masked card number that the processor provides (e.g. 423456******7890) and should be able to return several months of historical transactions to establish a pattern of use before the fraud occurred.

Ideally, the transaction history should list the product purchased and location of each transaction. It’s much easier to dispute if you can clearly show this information. If all you have is Terminal IDs and prices, it’s harder to document your case, because you’ll have to manually look up each product and location in your VMS, which is a time-consuming process.

It should be easy to export the transaction list to Excel or email so you can send the results to your processor.

Affects a small percentage

Maeve McKenna Duska, senior vice president of marketing for USA Technologies, indicates that historically chargebacks are negligible, less than 0.0001 percent of the close to one million transactions passing through the USAT network each day. The percentage is even less for transactions under $10. “It’s so low, we have never pushed the chargeback fee back to one of our operator customers,” said Duska, although legally, the operator is ultimately responsible for the fee.

Really, the issue with the liability shift and EMV cards only relates to counterfeit cards, Duska reports after conversations with USAT contacts at some of the major card brands. “What operators need to know is that merchants already held liability for a lost or stolen card and are subject to a chargeback fee when an inquiry is opened. With EMV and the liability shift, it just adds counterfeit cards —when a duplicate copy is made and used,” she said.

“Since the liability shift in October 2015, USAT has only seen chargebacks increase slightly — by thirty six dollars total over our entire universe of transactions so far. We continue to monitor this, but don’t expect an appreciable increase going forward because of the nature of the small-ticket markets we serve. Credit card fraud most often occurs online or for larger, more expensive items in traditional retail stores,” Duska explained.

However, Duska does see EMV cards affecting the future of cashless in another way. “It’s my belief that consumers will leap over paying with EMV cards, which produce a more complicated transaction, right to mobile payments,” she said.

There are a number of reasons why EMV might be the push mobile needs. For one thing, since a mobile payment uses near field communication (NFC) standards, the cashless transaction is EMV compliant. “Consumers paying with a mobile device means the operator is now in EMV compliance,” said Duska. Colleges and university campuses, which were named in some early EMV chargeback fee reporting as potentially high areas of fraud, are the quickest adopters of mobile payment, reports Duska. “In the end, upgrading to an EMV compliant reader is a business decision. Every operator must balance the risk versus benefit for their business and invest accordingly,” said Duska. “That might include encouraging consumers to make payments via mobile.”

NAMA, the association serving the vending and refreshment services industry, hasn’t heard complaints about the EMV liability resulting in additional chargeback fees for operators, concluding that if it is happening, it’s not very prevalent. NAMA Knowledge Source Partner on vending technology, and MSU/NAMA Endowed Professor — Emeritus, Michael Kasavana, said, “With regard to chargeback fees associated with EMV cards, I can honestly say that to date, I have not heard of a single case in the vending, refreshment services or micro market channel.”

Kasavana suggests this could be due to a number of factors, such as that EMV is not yet widely used as well as some zero liability initiatives that would result in the fees being under reported. He remained unable to indicate if this situation would significantly impact the vending industry, but there will likely be discussions or adjustments to the chargeback fees coming in the future. “With the implementation of EMV, the card associations were supposed to have published new chargeback codes and fees,” he said. Unfortunately, at least two of the major card brands’ counterfeit transaction codes don’t appear to include this information [as of press time]. Also, chargeback fees themselves will be analyzed. “The key statistic [card associations look at] is the chargeback ratio,” Kasavana said. “…the ratio involves dividing the number of chargebacks by the number of transactions within a given time period.” The ratio is often used to evaluate if a chargeback rate for a channel’s transactions is too high or low…as a general rule, a chargeback ratio of less than 1 percent is considered the norm. “Hence, an excessive chargeback fee might be applied a first time, and then evaluated for future applicability,” finished Kasavana.

Future outlook

What precisely the EMV card, liability shift, and resulting fees mean for the vending industry is still being determined. Previously, many operators and experts didn’t believe the EMV liability shift would really affect vending all that much, since the likelihood of fraudulent cards being used to buy drinks and snacks is very low. However, the fees associated with vending transactions mistook for fraudulent charges has opened some eyes.

Unfortunately, the result is more work for the vending and micro market operator. It is imperative that operators monitor their financial statements and challenge chargeback fees on transactions that clearly are legitimate. With the banks’ efforts to adapt and card associations working on codes and monitoring/adjusting fees, this will hopefully just be a bump on the cashless learning curve soon smoothed out.