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AFD Chargebacks

AFD Chargebacks

How Can Retailers Prevent Pain at the Pump Due to Chargebacks?

Customers tend to assume gas stations take in money hand-over-fist. The reality is that operators of automated fuel dispensers (AFDs) generally have very thin margins.

Even under the best circumstances, many operators generate as little as two percent in profit from a gallon of gas. This makes AFDs especially vulnerable to costly chargebacks. But why are AFDs so threatened by chargebacks? More importantly, if you’re an AFD operator, what can you do to protect your bottom line?

As you probably already know, a credit card charge must first get authorization from the cardholder’s issuing bank before you can accept it. This ensures that cardholders have enough funds in their accounts to cover any purchases. Receiving an authorization doesn’t mean the transaction is finalized, though.

For weeks—or even months—after the sale, a cardholder may be able to turn around and demand that the bank “undo a transaction.” This forced payment reversal is called a chargeback.

AFD Chargebacks Explained

If your customer files a chargeback, you stand to lose the funds from the original transaction and pay additional fees and costs. To illustrate this point, let’s assume an individual buys $75 worth of gas, then the cardholder files a chargeback. In this case, you’d lose the $75, lose the actual fuel, and pay a nonrefundable fee (as determined by the acquirer). This also doesn’t account for the cost of overhead from processing and trying to fight the chargeback if you believe if was filed in error.

Considering the kinds of margins with which AFD operators work, it may take hundreds of sales to recoup losses from just one chargeback. So, why is this even allowed?

Chargebacks have existed for decades. They’re an important consumer protection mechanism intended to give customers some recourse in the event of fraud. With the evolution of eCommerce as an important new market, though, chargebacks have started taking on a different character.

Despite the reason code attached to each dispute, we can trace all chargebacks to one of three fundamental sources:

Merchant Error

Merchant Error

The minor policy and procedural oversights that may lead customers to file chargebacks.

Criminal Fraud

Criminal Fraud

Bad actors using stolen cardholder information to complete transactions.

Friendly Fraud

Friendly Fraud

Cardholders completing transactions, then later claiming the purchase was unauthorized, or should otherwise be overturned.

As much as 60-80% of all chargebacks may be connected to friendly fraud. And, while this problem first arose online, it’s quickly spilling into the AFD market, too.

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Is Anything Being Done?

The short answer is yes: most figures in the payments industry understand that fraud and chargebacks are a major problem. There are steps being taken to mitigate the impact on businesses, but judging the effectiveness of those moves is a bit more complicated.

One of the biggest threats traditionally facing gas stations is counterfeit cards. Fraudsters use skimmers to steal cardholder data and either produce counterfeit cards, or sell the data to a third party who then manufactures counterfeit cards. EMV chip technology is a very effective tool for preventing cardholder data theft: by 2019, cases of counterfeit card fraud had fallen 76% in the US, due largely to widespread use of EMV technology.

AFD operators have added incentive to employ EMV chip readers at the pump due to the upcoming liability shift. As of October 1, 2020, you could automatically be held liable for any fraud occurring at AFD pumps if that pump doesn’t use an EMV chip reader. On the flipside, you won’t be held liable for any fraudulent transactions involving counterfeit cards, as long as those transactions are EMV compliant.

Of course, counterfeit cards are just one of many issues that could cause chargebacks. EMV technology does nothing to prevent friendly fraud, as the customer could simply claim the card was stolen.

What Can I Do About Chargebacks?

Fighting the rising tide of chargebacks at the pump isn’t going to be easy. That said, there are some basic practices you can put in place to help prevent disputes.

  • Address Verification Service (AVS): With AFD credit transactions, AVS works by verifying the cardholder’s billing address against the ZIP Code entered by the customer. If the address doesn’t match the one entered by the user, it indicates an elevated fraud risk.
  • Accept Declines: Don’t try repeatedly submitting a transaction if the issuer declines the initial authorization request. Instead, you should ask for another form of payment, or reject the transaction.
  • Don’t Take Expired Cards: You should never accept a card after its expiration date.
  • Prevent Duplicate Transactions: Ensure that your systems are up-to-date and will not accidentally submit a transaction more than once. If the same transaction is submitted more than once, for instance, the customer will file a chargeback.
  • Don’t Delay When Submitting Transactions: You should submit all transactions for clearing in a timely manner (preferably the same day). If you wait too long, the customer may be caught off-guard and, unable to recognize the transaction, suspect it is fraudulent.

While these are all important practices to help prevent criminal attacks and merchant error, that still leaves the problem of friendly fraud.

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Is There a Friendly Fraud Solution for AFD Merchants?

The chargeback process used to be an obscure payments industry procedure. More and more cardholders are aware of it now, though, and they’re using it as a tool to commit friendly fraud. It’s not always deliberate: sometimes a buyer may simply not recall completing the purchase and assume it’s fraudulent. Other times, however, the user might abuse the chargeback process deliberately to try and get something for free.

Friendly fraud is post-transactional in nature. It doesn’t appear as fraud until the moment the customer files a dispute, so pre-transactional tactics won’t really work. The key to friendly fraud is first eliminating the possibility of merchant error or criminal activity. Once these threats are managed, you can engage in chargeback representment to fight back against friendly fraud.

Representment is the only reliable method of recovering revenue lost to friendly fraud. That said, it’s a complicated and time-consuming process involving multiple parties, extensive recordkeeping, and lots of back-and-forth communication between you, the banks, and the card network. Like most merchants, you probably don’t have the time or resources to fight and win disputes.

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