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Merchant chargebacks

What is a chargeback?

A chargeback is like a refund. It is a right which may be exercised in certain situations by a cardholder's financial services provider (FSP) against a merchant’s FSP, to charge back responsibility for a card transaction from the cardholder's FSP to the merchant's FSP.

When do chargebacks occur?

It occurs when a cardholder disputes a transaction on their credit or debit card, or through a direct debit, and asks for the charge to be reversed.

Chargebacks can only be made for certain reasons, and will depend on matters such as:

  • The terms and conditions of the credit or debit card or the bank account, which will explain when and how a cardholder can claim a chargeback.
  • The rules of credit or debit card scheme, such as Visa, MasterCard, or American Express.
  • The Merchant Agreement, which sets out when a transaction is invalid or unacceptable, and is liable to be charged back to the merchant (where the dispute is lodged by a merchant)
  • Reasons given by the cardholder for wanting the transaction charged back (where the disputes is lodged by the cardholder).

If the cardholder’s reason for disputing the transaction does not fall within the card scheme’s reasons, the FSP may not be able to reverse the transaction. In these circumstances, the cardholder may need to take up their complaint directly with the merchant (the company that provided the goods or service).

Small business owners who have a merchant facility with an FSP should also be aware of how chargebacks work. It is important to remember that the cardholder’s bank is required to claim a chargeback and the merchant’s bank is obliged to process a chargeback against the small business’s merchant’s facility if the reason for the chargeback is consistent with the relevant card scheme rules. Some common reasons for chargebacks are:

  • No cardholder authorisation
  • Illegal transaction
  • Forged signature on voucher
  • Expired card
  • Goods/services not supplied
  • Transaction over floor limit without authorisation
  • Processing offline when terminal working

A merchant should respond promptly to any chargeback request and supply relevant information to its FSP.

Most merchant chargeback disputes are raised where a merchant has a chargeback claimed against them or where the merchant is a victim of fraud and the dispute is lodged against the merchant’s FSP. Most frauds against merchants occur through online and email transactions.

Common scenarios

More examples of scams are available on the Scamwatch website at: https://www.scamwatch.gov.au/types-of-scams.

The Ghana scam

Merchant is contacted by email (usually) asking to provide a particular product. Travel service operators are often targeted, as are merchants who sell goods that are very heavy (one eg is coffins). The aim is not to get the goods and services, but to get cash from the merchant. If the merchant sells travel products (accommodation, tours, etc), the fraudster pays more than the cost of the product with a stolen credit card and then asks the merchant to send funds via money transfer to pay for 'interpreters', 'car hire' or similar. If the merchant sells a product, the fraudster pays more than the cost of the product with a stolen credit card and then asks the merchant to send funds via money transfer to pay a 'freight company'. Usually no goods are lost and no services provided. The loss is the amount of funds sent.

The 'Get the Goods' scam

The fraudster wants products – usually electronic – and orders them using stolen credit card numbers. The goods are shipped, often to a distribution centre (such as Singapore airport), where the fraudster has arranged for them to be forwarded on, but has made tracking them difficult or impossible. The loss is the value of the goods sent.

Liquor & Tobacco Merchants

The fraudster comes to the business premises and builds a relationship with the merchant, often promising big contracts in the future. There is a frenzy of buying over a relatively short period. Usually, counterfeit cards will be used, but some merchants sell without ever seeing a card, or with a damaged card (offline). If a card is present and a signature obtained, the merchant will not usually be charged back, providing the merchant has acted in accordance with the agreement. If no card is present (ie the card numbers are keyed in) or if the merchant processes offline, generally the merchant will be unable to resist a chargeback.

Offline transactions

The fraudster comes into a business with a damaged or cancelled card (often the fraudster's own). The fraudster shows the merchant how to process a transaction 'off-line', which circumvents the approval process. The fraudster takes cash and/or goods. This can go on for weeks before it is picked up. The chargeback occurs because the merchant has processed the transaction contrary to the merchant agreement (processing offline when the terminal is working).

Stolen terminals

Merchant's business is broken into and the terminal stolen or merchant is duped into handing over the terminal to a person claiming to be from the bank. Thief uses terminal to process 'refunds' to an account, and funds are withdrawn.

Case study

More case studies are available on our website at www.fos.org.au/casestudies.

Conrad ran a small computer sales business and was the victim of a credit card fraud. Conrad said that a consumer had paid cash for two laptops, then rang with a story that their friends also wanted to purchase laptops. The consumer provided credit card details over the telephone, and all but one of the transactions went through when Conrad sought authorisation.

Later, Conrad discovered that his financial services provider (FSP) had charged back these transactions because the cardholders said they had not authorised the transactions. Conrad complained that he had sold computers to the value of $10,000 and his FSP had no right to charge back these transactions.

Conrad lodged a dispute with FOS. We considered that Conrad had taken a risk by accepting the card details over the phone and not obtaining authorisation from the cardholder by signature or PIN. The FSP's authorisation only verified that none of the cards had been reported stolen and that there was sufficient credit available on the cards to complete the transaction. It did not guarantee the cardholder's authorisation for the transaction.

We decided that the FSP was entitled to chargeback the transactions, because the true cardholders had not authorised the use of their cards for the purchase of the laptops.