Credit card chargebacks are the return of funds back from the merchant to the credit card owner, forced by the credit card issuing bank. The chargeback mechanism was put in place to protect consumers and is regulated by the Federal Reserve under the Electronic Funds Transfer Act. A consumer initiates a chargeback by contacting the credit card issuing bank a filing a complaint about one or more items on their credit card statement. Chargebacks are the consumer’s weapon against fraudulent merchants and in cases of identity theft where the credit card was stolen and used by an unauthorized party. Once filed, the credit card’s issuing bank will withdraw the money back from the merchant to which it was paid and credit it back to the consumer who owns the credit card.

Once a chargeback claim is filed by the consumer and sent to the credit card’s issuing bank (e.g. Bank of America), the issuing bank will send it to the approprate credit card network (e.g. Visa). The credit card network then forwards the chargeback claim to the merchant’s payment processor (the body that processes credit card payments on behalf of the merchant), which withdraws the money from the merchant’s bank account and sends the merchant a notice about the chargeback (typically, by fax). The merchant then has 14 days to dispute the chargeback, otherwise the money is permanently returned to the consumer.

Chargebacks can be caused by technical reasons (e.g. the credit card has insufficient funds), clerical reasons (e.g. duplicate charges caused by mistake) or fraud claims by consumers, where consumers claim to have not made the purchases disputed by the chargeback. Typically fraud is separated into two types: true fraud, where consumers intentionally dispute purchases they’ve made, and “friendly fraud”, where consumers don’t remember making a purchase and file a chargeback claim by mistake.

In case of a chargeback claim, the merchant needs to prove that the consumer did indeed receive the good/service for which the payment is disputed. To do this, the merchant needs to keep track of their interaction with all their customers: phone calls, mail sent and received, store visits and online website activity. For online merchants fraud is harder to fight because of a lack of physical signature on the purchase receipt, so it is usually advisable for them to keep track of every page the consumer visited, as well as other information such as the IP addresses from which they visited the site.

For online purchases, there are several indicators of possible fraud that the merchants should keep tab on:

• Distance between the credit card’s billing address and the geographical location from which the consumer is logging in to the website (this can be inferred from the consumer’s computer’s IP address).
• Purchases done through proxy servers which anonymize web traffic and hide the originating computer’s IP address.
• Purchases done with a free email address provided by email providers who’ve had a high percentage of fraud in the past.