Mastercard chargeback reason code 4870 is one of the numeric labels assigned by banks to each customer dispute, indicating the given reason for the claim. We say the given reason because it may or may not reflect the true reason.
Under certain circumstances, Mastercard may allow consumers to reverse a payment card transaction by filing a chargeback. Chargebacks were designed to be a “last-resort” for disagreements that cannot be resolved with the merchant, but are more and more often used as a loophole to commit fraud.
Reason code 4870 refers to the broad category designated “No Cardholder Authorization.” This generally refers to fraud. Several reason codes fall under this heading, and it is important to differentiate between chargebacks with reason code 4870 (Chip Liability Shift) from those with reason code 4871 (Chip Liability Shift Lost/Stolen/Never Received Issue).
Obviously, both involve a liability shift, which we will explain below. The difference lies in whether the cardholder used the card. With that in mind, let’s look at Mastercard reason code 4870: “Chip Liability Shift.”
Should Merchants Worry About Reason Code 4870 Chargebacks?
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What Is Chip Liability Shift?
Chargeback reason code 4870 has to do with whether or not the merchant in question has installed and is using terminals that can accept EMV or “chip” payment cards. If the merchant is not EMV-compliant, the liability for a fraudulent transaction shifts from the card issuer to the actual merchant.
To understand that better, let’s look at how these situations arose in the first place. In earlier days of payment card usage, merchants were required to make a physical impression of the card being used. This practice waned when the card networks began including customer data on the card, coded into a magnetic strip.
While this worked well for a time, fraudsters soon figured out ways to copy the information and create counterfeit cards. That led to the introduction of new chip cards, which are exponentially more secure. The data on a magnetic stripe never changes, whereas chip cards are dynamic. This means they create a unique, one-time-use code for every transaction (a process called tokenization).
Unfortunately, in order to accept the new type of card, merchants had to upgrade all their card-reading equipment. The cost could be prohibitive, so in many cases, merchants dragged their feet. The merchant was usually not liable if a purchase involved a false or stolen card. So, the consequences for not upgrading were minimal. That changed with the introduction of a chip liability shift chargeback.
What Is a Liability Shift Chargeback?
A cardholder who spots an unauthorized charge on an account has the right to claim that the transaction was fraudulent, and file a chargeback with the bank. Since most issuers offer “zero liability” in cases of fraud, the bank is responsible for refunding the customer.
This occurs much less frequently, however, when chip cards are used. The card networks created the chip liability shift to encourage merchants to switch to EMV-compliant readers. Now, the burden of liability shifts to the merchant if the bank can show that a fraudulent transaction would have been detected by a chip reader.
In other words, if a fraudulent transaction involves a chip card, but the merchant didn’t process the transaction using the chip, the bank could claim that the merchant was responsible. The issuer would refund the cardholder, and could then claw back the money from the merchant as compensation.
There are two different scenarios where this could happen. Reason code 4870 chargebacks are used when a fraudster either steals or copies a working credit or debit card, then uses that card to make a purchase. Instead of “dipping” the card so the chip can be read, the fraudster swipes the magnetic strip.
Because of the technology involved, EMV-compliant readers would likely detect a potential fraud issue when the chip was read. If the merchant does not have EMV card readers installed, however, or allows the purchaser to swipe instead of insisting the card be dipped, it would not detect the fraud. Thus, the merchant would be held liable.
Obviously, there’s a problem that needs to be addressed if a business regularly receives legitimate chargebacks because an EMV reader was not used. This is especially true in cases of criminal fraud.
As we alluded to earlier, though, a false reason code may be used to mask a cardholder’s attempt at fraud. Merchants’ acquirers should challenge invalid 4870 chargebacks through the representment process if either the disputed transaction was authorized, or the card used was valid, just not an EMV chip card.
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Chip Liability Shift Disputes: Conditions and Prevention
Issuers have a limited timeframe to file chargebacks claiming that the liability shift should apply. Disputes must be filed within 120 calendar days of the transaction processing date.
The good news is that, because these chargebacks are largely the result of merchant actions, they are 100% preventable. Merchants can protect themselves by adhering to basic best practices:
- Upgrade all card-readers to be EMV-compliant
- Always obtain secondary verification; token, PIN, signature, biometrics, etc.
- Insist that all chip cards be tapped or inserted, not swiped
Vigilance and training are key here. Merchants must be certain that staff members understand and practice these requirements.
Chargeback Prevention: A Wider View
While merchants can take many steps to help prevent legitimate claims, fraudulent chargebacks are another matter: friendly fraud is post-transactional in nature, meaning there’s no sure way to identify it beforehand. Merchants can do everything “right” yet still have a customer dispute filed against them.
So while it’s generally more efficient to take a proactive stance when it comes to chargeback management, a truly effective strategy must encompass both prevention and disputing cases of friendly fraud.
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