Chargeback Liability

Chargeback liability is the obligation to bear the cost of a chargeback, the reversal of a card payment that an issuer starts on behalf of its cardholder. When a chargeback succeeds, someone in the payment chain loses the transaction amount and associated fees. Card scheme rules, the merchant's contract with its acquirer and, in some cases, consumer protection law decide whether that party is the merchant, the acquirer, a payment facilitator or the card issuer.

In ordinary cases the merchant is liable, because it made the sale and is best placed to prevent fraud, deliver goods and handle refunds. The chain then works upwards: if the merchant cannot pay, the acquirer that sponsored it into the card network must cover the loss. Liability moves to the issuer only in defined situations, most notably when a merchant has used technology or procedures that the schemes reward with a liability shift.

1. The cardholder disputes a transaction with their issuer, which reviews the claim and, if it qualifies under a chargeback reason code, raises a chargeback through the network.
2. The network debits the acquirer and credits the issuer, which may credit the cardholder.
3. The acquirer passes the debit to the merchant, usually by deducting it from settlement funds or a reserve, and charges a handling fee.
4. If the merchant has valid evidence, the acquirer can contest the chargeback. If the issuer accepts the response or loses at arbitration, liability moves back to the issuer, which may in turn re-debit the cardholder.

Card schemes use liability shifts to encourage security measures:

• Online authentication. When a card-not-present payment is successfully authenticated with 3-D Secure 2, liability for fraud chargebacks generally moves from the merchant to the issuer. Payments sent with an exemption from authentication usually leave liability with the merchant or acquirer that requested it.
• Chip technology. For in-person payments, liability for counterfeit fraud falls on the party that did not support EMV chip technology. If the card had a chip but the merchant only swiped the magnetic stripe, the merchant is liable; if both used chip, counterfeit losses stay with the issuer. Similar rules apply to lost and stolen fraud where one side lacked PIN support.
• Authorisation. A merchant that completes a sale without a valid authorisation, or after a decline, generally remains liable for any resulting chargeback.

Liability shifts apply mainly to fraud disputes. They do not protect a merchant from consumer disputes, such as goods not received, not as described or refunds not processed, which depend on the merchant's own conduct and evidence.

Acquirers carry contingent liability for every merchant they sign up. If a merchant goes out of business after taking payments for goods it never delivers, such as airline tickets or event bookings, the acquirer can face large chargeback losses. To manage this, acquirers carry out merchant underwriting, set limits, delay settlement for higher-risk merchants and hold a merchant reserve, often as a rolling reserve percentage of each day's sales. A payment facilitator is liable to its sponsoring acquirer for the chargebacks of all its sub-merchants, so it applies similar controls.

Issuers are liable where the rules favour the merchant: after successful authentication, when they lose a dispute because the merchant proved delivery or authorisation, or when they miss deadlines. They also absorb fraud losses that fall outside chargeback rights, such as many in-person chip fraud cases. Issuers may in turn recover amounts from cardholders where a dispute is shown to be false, as with friendly fraud, but consumer protection rules limit when they can do so.

Merchants reduce liability by authenticating risky online payments, using chip and contactless terminals, keeping clear delivery and usage records, writing clear refund policies and offering refunds before disputes escalate. They also use dispute alerts and evidence frameworks, such as compelling evidence rules that let merchants prove a repeat customer made a disputed purchase. Acquirers monitor chargeback risk across their portfolios and may terminate merchants whose disputes exceed scheme thresholds, since excessive chargebacks can lead to scheme fines for the acquirer as well. High-risk sectors often accept higher reserves and fees as the cost of obtaining an acquiring relationship at all.