Typically the maximum time a buyer has to file a chargeback with their credit card company is 120 days after the expected delivery of the agreed goods or services. PayPal advises its merchants that resolving these disputes can take up to two months. During this time, the revenue from the disputed sale is withheld from the merchant's account.
One of the fastest growing types of chargebacks is what's known as "friendly fraud" — it is when consumers purchase products with the intent of initiating a chargeback in order to get free merchandise. Since the recession, this type of fraud is on the rise.
The responsibility for family fraud
"Ultimately the cardholder is responsible for family fraud. For instance, we could never get away with giving our bank account password to our son or daughter. Then going to our bank and saying 'I have no idea how they got access and sent money to themselves.' That would never fly today," says Eaton-Cardone. "They would say they are sorry that you gave your pin to your child and they used your pin to withdraw cash. There's nothing we can do for you!"
When it comes to online transactions there are loopholes that consumers unfortunately can exploit. The dangerous thing about family fraud is that once a consumer finds out about this loophole, they have the tendency to develop a learned behavior and will do it again."
"If you take a look at the average chargeback. Every $100 in chargeback costs the merchant around $300. When the merchant incurs more cost, they then start increasing the price of their products. To cover those costs they also will start strictly enforcing the policies and decreasing the amount of flexibility that they have," said Eaton-Cardone.
There is a fee for retrieval requests. These request are made by banks when a cardholder disputes a charge. Charges for the retrieval range from $5-$15. The dispute moves to a chargeback if information retrieved does not satisfy a buyer or the customer's issuing bank. Merchants have to pay the chargeback fee even if the cardholder's claim is rejected.
Chargebacks can be very expensive to a company. The burden of proof in disputes is on the merchant to show that a customer has been rightfully charged. If the consumer successfully disputes the charges, the merchant loses both the product sold and the money from that sale. Additionally, both Visa and MasterCard have a strict limit on the total number of chargeback transactions that can be charged back before fines and penalties are levied.
Eaton-Cardone believes that merchants can help prevent family fraud by encouraging their customers to consistently change their password every 30 days, and not automatically. Here are a few other things merchants can do to reduce chance of fraud: swipe cards when possible, be transparent with returns policy, ensure truth in advertising, respond quickly to retrieval requests and chargebacks promptly, and follow the terms of service set by the card brand.
She also believes that when merchants fight chargebacks they are sending a powerful message to banks and consumers — which can likely lead to decreases in future disputes. Eaton-Cardone said that consumer education is the responsibility of the merchants and can also help reduce dispute losses.
"The biggest problem with family fraud is not that we have a whole bunch of criminal-minded consumers out there that want to steal," asserts Eaton-Cardone. "The biggest problem is ignorance, lack of education."