History marches ever onward. Money has been around for several thousand years, but it has evolved considerably over that time. Lending and credit have been around for a long time too, although the industry looks much different today than it did just a century ago, let alone a thousand years ago. Today, credit and debit cards are replacing coins and paper money.
Yet for probably as long as there has been money, there has also been fraud. Further, like money in and of itself, financial crimes have evolved, and modern threats, like chargebacks, are a grave menace to individuals and organizations.
Let’s take a quick look at the history of credit and debit cards -and also chargebacks- so that you can better understand the dangers. Arguably, fraud is a more persistent and grave threat today than in the past, with chargebacks an especially worrisome risk.
Money and the Path to Modernity
Humanity has been around for hundreds of thousands of years, while money only began appearing within the past several thousand years. Long before money was invented, people were already trading. However, for a long time, trade typically revolved around bartering. Twenty thousand years ago, one person might have crafted a spear and then traded it for a cut of meat, for example.
Bartering, however, is an inefficient way to organize economies. Bartering is often slow and “price” swings can be dramatic as demand for something (e.g. spears) ebbs and flows. It’s also difficult to store value and accumulate wealth through bartering. Money, on the other hand, typically reduces friction in trade and makes it easier to both build and store wealth.
The earliest known form of money appeared roughly 5,000 years ago in ancient Mesopotamia. The so-called Mesopotamian shekel was typically crafted of silver. Throughout most of history, money has been based on commodities and especially precious metals. These days, fiat money, which isn’t tied to a commodity, is the most popular form of currency. The earliest known fiat currency appeared around 1,000 AD in China.
Fraud and financial crimes too have been around for a long time but have continued to evolve. In the USA, the first known bank robbery occurred in 1831, when James Honeyman and William J. Murray robbed the City Bank of New York.
Of course, financial crimes and robberies have occurred long before the City Bank of New York robbery. These days, fraud is common and often very sophisticated. Chargebacks, in particular, illustrate just how devious criminals have become.
Cards, Fraud, and Chargebacks
These days, physical currencies are going the way of the dinosaur as more and more people rely on credit and debit cards. The precursors to the modern credit card began to appear in the late 19th century with the advent of charge cards that allowed folks to access charge accounts at various businesses.
By the 1950s, American Express and Visa cards, among others, began to appear. In 1968, magnetic stripes were introduced, ushering in the era of modern credit cards. Yet many consumers were slow to adopt credit cards. Not only were such cards then unfamiliar to the masses, but there were legitimate concerns that credit cards could open the door to fraud. Consumers might find themselves on the hook for fraudulent transactions made with stolen credit card numbers and spoofed cards.
The US Congress created chargebacks. It passed the Fair Credit Billing Act in 1974, which required card networks and banks to offer cardholders recourse if their cards were misused or if they were otherwise targeted by fraud. This paved the way for credit card chargebacks. In 1978, Congress passed the Electronic Fund Transfer Act, which extended many protections to also cover transactions made with debit cards.
Once protections were in place, credit and debit card use began to dramatically increase. Still, for many customers, cash (and checks) remained king. In the 1990s, ecommerce took off. Cash and checks are impractical for ecommerce, so instead tech companies and consumers relied on credit cards and debit cards. As time marched on, online platforms like PayPal were also invented.
Chargebacks Are Now a Modern Scourge
When used properly, chargebacks protect cardholders from unscrupulous scammers. Unfortunately, however, chargebacks have also opened the door for fraudsters looking to target businesses. In some cases, cardholders themselves perpetrate fraud. Someone might make a legitimate purchase with their credit card, only to later file a chargeback in an attempt to get their money back, while also being able to keep whatever they purchased.
Sometimes, this type of fraud is referred to as friendly fraud, but make no mistake, there’s nothing “friendly” about chargeback fraud. It’s better to think of it as “first-party” fraud.
Many chargebacks also stem from third-party fraud. A hacker might steal someone’s credit card information, for example. Then they can use the stolen data to make unauthorized purchases. Often, merchants are held responsible for this fraud even if they did nothing wrong.
Merchants can now use tools like chargeback alerts and dispute management platforms like ChargebackHelp to reduce chargebacks or to claw back revenues by successfully winning chargeback disputes. It’s crucial to have a robust approach to fighting chargebacks in place. Ultimately, chargebacks are a modern problem, but fortunately, modern chargeback and dispute management solutions are available.
What is the Future of Chargebacks?
The future of chargebacks is poised for significant changes as technology progresses and consumer expectations evolve. Anticipated developments include advancements in fraud prevention, improved dispute resolution processes, a stronger focus on customer experience, increased collaboration and data sharing among stakeholders, the emergence of alternative dispute resolution methods, and the implementation of stricter consumer protection regulations. These transformative elements will shape the landscape of chargebacks, requiring businesses, payment processors, and consumers to adapt and navigate the evolving terrain effectively.
Legitimate Reasons for Customers to File Chargebacks
-
Unauthorized Transactions
If a customer notices unauthorized charges on their account, they have the right to dispute those transactions and initiate a chargeback to protect themselves from fraudulent activity.
-
Non-Delivery of Goods or Services
When customers pay for goods or services but do not receive them within a reasonable timeframe or as promised, they may file a chargeback to recover their funds.
-
Defective or Substandard Products
If customers receive products that are defective, damaged, or significantly different from what was described or advertised, they can file a chargeback to seek a refund or replacement.
-
Billing Errors
In cases where customers are overcharged, double-charged, or billed for items they did not purchase, they can file a chargeback to rectify billing discrepancies and obtain a refund.
-
Subscription Cancellations
If customers attempt to cancel recurring subscriptions but continue to be billed, they can file a chargeback to stop further charges and reclaim their money.
-
Failure to Honor Refunds or Return Policies
If customers comply with a seller’s refund or return policy but are denied their rightful refund or return, they may resort to a chargeback to enforce their consumer rights.
It’s important to note that chargebacks should be used as a last resort after attempts to resolve the issue directly with the merchant have been unsuccessful.
