Liability shift refers to the transfer of financial responsibility or liability from one party to another in the context of fraudulent or disputed transactions. It typically occurs in the payment card industry, specifically for transactions involving credit cards or debit cards.
When a fraudulent or disputed transaction takes place, determining who bears the financial responsibility can be crucial in resolving the issue. The concept of liability shift helps establish which party — either the card issuer or the merchant — will ultimately be responsible for any resulting losses.
Here are two common scenarios where liability shift may come into play:
- EMV Chip Cards: With the introduction of EMV (Europay, Mastercard, and Visa) chip technology, there has been a shift in liability for fraudulent transactions. In regions where EMV adoption is widespread, such as Europe and many other parts of the world, if a transaction occurs at a chip-enabled terminal using a chip card, and the transaction turns out to be fraudulent, the liability for the fraud typically rests with the party that did not support EMV. For example, if the merchant has not upgraded to EMV-capable terminals, the liability for fraudulent transactions may shift from the card issuer to the merchant.
- Chargebacks: In cases where a cardholder disputes a transaction and initiates a chargeback, the liability for the transaction is initially placed on the merchant. However, if the merchant can provide compelling evidence to refute the chargeback claim, the liability may shift back to the cardholder, resulting in the chargeback being reversed, and the funds being returned to the merchant.
The purpose of liability shift is to encourage the adoption of security measures and technologies that can help prevent fraudulent transactions. By shifting the liability to the party deemed less compliant with security standards or fraud prevention measures, it incentivizes businesses to invest in secure payment processing systems and procedures.
It’s important to note that liability shift rules can vary depending on the region, card network, and specific circumstances. Card networks like Visa, Mastercard, American Express, and Discover have their own rules and guidelines regarding liability shift, and these rules may evolve over time.
Merchants and businesses should be aware of the liability shift rules that apply to their specific payment processing environment and take necessary measures to comply with security standards and fraud prevention practices. By doing so, they can minimize the financial risks associated with fraudulent or disputed transactions.
Written by Andrii Vovk