When one makes a purchase using a credit or debit card, that person enjoys certain consumer protections offered by card networks like Visa and Mastercard, along with the bank that issued the card. One of the primary protection mechanisms is the chargeback.

A chargeback is a kind of forced bank reversal. The process was first introduced in the 1970s, as mandated by US law. For many years, the process worked just fine; the system was not prepared for the introduction of eCommerce, though, and that’s created problems.

Now, more and more consumers file chargebacks without a valid reason to do so. This has immediate consequences for businesses, but can negatively impact the cardholder, too.

“Friendly fraud” describes a situation in which a cardholder files a chargeback without a valid reason. It may be an honest mistake, or it could be deliberate abuse. In either case, there could be consequences for the cardholder if abuse is identified.

1) Loss of Funds: The bank will uphold the original transaction, allowing the seller to keep the funds from the sale. Even if the cardholder might have been able to request a merchant refund beforehand, that option is no longer available.

2) Blacklisting: The merchant may blacklist the cardholder, leaving them unable to make any additional purchases.

3) Loss of Banking Support: If abuse is serious enough, the bank may judge the cardholder to be too much of a liability, and close the customer’s account.

4) Damage to Credit Score: Credit reporting agencies will take note if a cardholder loses banking privileges, especially if it increases the person’s credit utilization ratio. This will hurt the person’s credit score, making it harder to open future lines of credit.

Of course, there’s also the simple matter of merchant costs to consider. When chargebacks hit merchants, it increases their costs, shrinking their profit margin. If the problem becomes a sustained issue, the seller could be forced to raise prices, impacting consumers as a whole.

Chargebacks are an important consumer protection tool. They must be handled carefully, though. If abused, chargebacks can become a costly problem for businesses and merchants alike.