Why the EMV Transition is Bad for High Risk Merchants

If you’re in a high risk industry that primarily takes payments via MoTo (phone sales) or online (eCommerce sales) then you might have thought that the transition to EMV wouldn’t have much effect on your business. You’re wrong. And unfortunately, the shift to EMV is not good news for you.

In case you’ve been living under a rock, the US has finally adopted chip card technology, and over the last six months businesses have been haltingly but inexorably been making the transition to accepting chip card enabled credit card payments. EMV technology was adopted in an attempt to reduce retail credit card fraud, which, long term, it will almost certainly accomplish. For eCommerce and MoTo transactions, however, the long term benefits are at best mixed, and in the short term, are almost certainly bad. That’s doubly true for high risk merchants.

Read on to learn why, and what you can do about it…

1. Europe’s Switch Pushed Fraudsters to the US

First, a brief bit of history. Europe made the switch to EMV chip card technology a decade ago. And as they did, country by country, credit card fraud shifted to those European countries that had not adopted EMV. The increase in credit card fraud for those European countries who lagged behind their counterparts in EMV adoption was so swift and so severe that all of Europel quickly adopted the technology. As a consequence, the bulk of the world’s credit card fraud shifted to the US.

2. EMV Shift Has Caused a ‘Fire Sale’ in Stolen Credit Cards

As credit card thieves shifted their focus to the US market, the US has seen a dramatic increase in the number of credit cards that have been stolen by fraudsters over the past few years. The hackers and fraudsters who steal credit cards typically attempt to unload them on the ‘dark web’ or via the black market. The stolen credit card market operates in the same way other efficient markets do, with prices regulated by the ‘invisible hand’ according to supply and demand.

As the supply of stolen US credit cards increased through widespread hacking, the price for stolen credit cards has fallen, making the fraudsters who buy and then use them less strategic and the practice more widespread. But what has really poured fuel on the proverbial fire has been the EMV shift. Fraudsters know that as chip card technology becomes widely adopted their window of opportunity to easily use their stolen credit cards closes, just as it did in Europe. Thus creating a fire sale in which those thieves who are sitting on a stockpile of stolen cards attempt to unload them for cheap, and buyers attempt to use them as quickly as possible.

3. EMV has Moved the Fraud to MoTo and eCommerce

As large retailers, most of whom have already incorporated chip card technology, have already begun to make using stolen credit cards more difficult, fraudsters have shifted their focus to eCommerca and MoTo merchants. All of this combined means that the average MoTo and eCommerce merchant is already seeing the tip of the iceberg in what is expected to be a significant spike in chargebacks.

4. Customers and Issuers Now Cry Fraud More Quickly

A few years ago, having your credit card stolen has something that likely hadn’t ever happened to the average consumer. Unfortunately, that has changed as international fraudsters targeted US credit card holders. And with the increase in the frequency of stolen information, customers and issuers are now significantly more likely to monitor their credit card statement with an eye for charges they don’t recognize, and immediately dispute them without much investigation. Whereas a few years ago customers might have called the business to inquire about the charge before initiating a chargeback, that’s no longer the case. In fact, in over 60% of ‘friendly chargebacks’ the customer never even attempted to contact the business prior to initiating the dispute.

That shift in mentality is even more true with credit card issuers. Whereas a few years ago credit card issuers treated all chargeback disputes from their customers equally, and generally required the customer to contact the business first, most large credit card issuers now use sophisticated modeling that enables them to identify the SIC code of the merchant their customer is calling about. And when that SIC code indicates a high risk industry, the issuer will push through chargebacks against high risk merchants with only scant evidence of the chargeback dispute’s legitimacy.

This means that businesses in high risk industries are increasingly subjected to friendly fraud disputes, which are of course illegitimate. Despite their illegitimacy, however, given the card brands ‘customer first’ method of adjudicating chargeback disputes and the fact that the technical requirements for a merchant to successfully fight a claim are byzantine, it’s no surprise that most small and mid-sized high risk businesses don’t bother to fight chargebacks at all (meaning they lose).

A Perfect Storm Against High Risk Merchants

Thus, the shift to EMV for retail businesses in the US has caused a cascading series of events (from triggering a fire sale in the sale of stolen credit cards, to creating a rush to use those stolen credit cards, to shifting the fraudsters focus to MoTo and eCommerce merchants, to causing customers and issuers to become more aggressive and reckless about initiating the disputes) all of which have led to high risk businesses seeing increases in their chargeback ratios which promise to get worse as the EMV shift continues.

The Consequences to High Risk Merchants

A few extra chargebacks for a low risk eCommerce or MoTo business would mean extra costs, but that’s about it. Unfortunately, the stakes are much higher for high risk businesses. That’s because most high risk businesses were already operating at approximately a 1 to 1.5% chargeback ratio simply because of their industry or business model. Once you layer onto that the flood of additional chargebacks due directly and indirectly to the EMV shift, many high risk businesses’ chargeback ratios jump into the 2-3% range and become in danger of having their high risk merchant account terminated.

Having a high risk merchant account terminated is so devastating for a business in a high risk industry, not only because it interrupts cash-flow, but because in many cases there are only a handful of merchant account providers who support that high risk industry. That means its increasingly difficult (and expensive) to obtain another merchant account with which that business can resume business operations.

Potential Solutions

What good would we be as high risk merchant service providers if all we did was paint a picture of gloom and doom without any solutions? Unfortunately, there aren’t any magic bullets, but there are a few things that you can do to effectively limit the damage the EMV shift poses to your high risk business.

1. If You Aren’t Fighting Chargebacks, Start.

   Most small and mid-sized high risk businesses do not fight chargebacks… at all. If that includes you, start right now. With most high risk credit card processors, won chargebacks do not count against your chargeback ratio. Thus, a 75% win rate effectively lowers your chargeback ratio by 300% (e.g. it takes you from 4% to 1%).

2. Outsource Your Fighting

   Unless you’ve got more than 100 chargebacks a month, don’t consider fighting your chargebacks in-house. Fighting chargebacks is an incredibly technical process with a surprising amount of nuance, so outsourcing the process will almost always give you better results. Moreover, fighting chargebacks is a relatively commoditized service, so the pricing is pretty competitive, and consequently outsourcing it usually yields a better net price than doing it in-house.

3. If you aren’t locking down your eCommerce with front-end fraud, start.

   In the eCommerce world, the fewer fields on a checkout page lower your shopping cart abandonment, and the more orders you’ll get. In a world with credit card fraud, however, you have to balance conversion rate with fraud. By requiring AVS, CVV and using a front end fraud filter that looks through proxies to identify the IP address of the customer, not only can you filter out a good amount of fraud on the front end, but you’ll dramatically increase your chances of winning friendly fraud disputes when the inevitable chargebacks come.

4. If Your Business Offers a Service, Use Chargeback Alerts.

   If you sell high ticket furniture, getting notified via a chargeback alert that a customer is charging back a $2,500 couch after you’ve already delivered it to them isn’t any help. After all, the customer has your couch, so you have to fight the chargeback, or else you’re out both product and revenue. By contrast, if you operate in a service business, or sell products with very high margins, chargeback alerts are the easiest way to avoid 20-25% of chargebacks.
   

   A chargeback alert is simply that, an alert that the customer has tried to initiate a chargeback, and you have 24-72 hours to refund the transaction and avoid the chargeback altogether. If you’re in an industry like remote tech support where the margins are high, or a business like credit repair where there are ongoing services that you can cease performing if the customer doesn’t pay, or even sell high margin products like dietary supplements or digital goods, it can make business sense to simply refund the charge when you receive a chargeback alert and just walk away from the sale. Sure, you lose all of the revenue, but you avoid the chargeback (and associated fees) and can cut your losses by stopping performing the service.

Conclusion

Unfortunately, the EMV transition, while good for minimizing credit card fraud for the nation as a whole, isn’t good news for eCommerce or MoTo merchants, particularly those in high risk industries. There are, however, some basic steps that you can (and should) take as a high risk business owner in order to minimize your costs and ensure that your high risk merchant account doesn’t see a spike of additional chargebacks that cause your account to be terminated.