Cashback Chargebacks

Table of Contents

1. Why Offer Cash Back?
2. What Is the History of Debit Card Cash Back?
3. How Does Cash Back Work?
4. How Does Cash Back Affect Chargebacks?
5. Conclusion
6. Frequently Asked Questions

It’s a little bit ironic that while cash-based transactions keep becoming increasingly less frequent, it’s never been easier to get cash. What once required an in-person transaction with a human bank teller became a self-service process at automated teller machines, and nowadays, who wants to bother hunting down an ATM that won’t charge fees when you could just get free cash back with any purchase at your local corner store? Once the exclusive domain of grocery stores, many merchants now offer cash back with a debit transaction as a convenience for their customers—but what happens when a customer asks their bank for a chargeback on a cash back purchase?

Why Offer Cash Back?

Merchants who operate brick and mortar stores and process card-present transactions have the choice of whether or not to offer their customers cash back on debit card purchases. The main reason to do so is because customers like it! It’s easy and convenient, it costs them nothing, and if your store sells inexpensive items they may come in and buy something just because they need to get some quick cash. This can lead to repeat customers, especially if the person lives or works nearby. Offering cash back can also be a convenient way for merchants to reduce the amount of cash they have to deposit by converting it into card sales that will be settled electronically.

However, there some potential downsides associated with providing cash back transactions, and merchants must always be aware of the dispute and chargeback implications for any expanded payment-related services they’re thinking about offering.

As customers, we tend to take the cash back option at point-of-sale terminals for granted, but it wasn’t always the case that you could do simple account withdrawals at the same place where you buy your eggs and milk. How exactly does this process work, and how did it get started in the first place?

What Is the History of Debit Card Cash Back?

The first merchant to offer debit card cash back was the British retail chain Tesco. They conceived the idea in the 1980s as a way to reduce the amount of cash their stores would have on hand. Since British banks charge a small percentage fee to businesses for depositing cash into their accounts, typically 0.5%, this saved the business money.

Large businesses like Tesco also often pay for an armored car service to transport cash from the in-store safe to the bank. Offering cash back reduces how often they have to pay for transportation. The customer service aspect was merely a side effect, but the service ended up being enormously popular, and soon other grocery stores copied the idea.

Cash back became popular in the U.S. in part because of ATM fees. Unlike British ones, American ATMs often charge a fee for withdrawing money if the user is not a customer of the bank with which the ATM is associated. Grocery stores offering cash back didn't charge this fee, and even if the customer didn't need groceries at the moment, making some small purchase to allow a cash back transaction was often less expensive than paying the fee for the ATM. In the years since, more and more business have started offering cash back as a service to their customers.

How Does Cash Back Work?

When a customer makes a cash back purchase—usually by entering or selecting a preset amount into the point-of-sale terminal—they are charged the price and tax for the goods they’re purchasing, plus the cash back amount. The cash back amount is given to the customer from the cash register, and the merchant gets the money back when the card transaction is settled.

There are certain restrictions that banks and card networks place on cash back transactions. Typically cash back can only be given on debit card purchases, not credit cards. However, Discover has started offering their customers the ability to get cash back with their credit cards like they would with a debit card. This cash back is treating like a normal purchase rather than a cash advance, but does appear separately on the billing statement. With all cash back transactions, the cash back amount cannot equal the total transaction amount—in other words, merchants can’t provide cash back only transactions; a valid purchase must be included.

Card networks provide limits on cash back amounts dependent on region. For example Visa limits cash back to a maximum of $200 in most countries. In addition, issuing banks can set their own limits on cash back transactions. There may also be limits on how much cash a customer can withdraw in a given time-frame. For example, if the customer has already withdrawn $100 from an ATM that morning, they may be limited to a maximum of $100 in a later cash back transaction. These limits vary widely depending on the issuing bank, however.

Cash back can only be given when requested through an electronic payment terminal that meets certain requirements—for example, the terminal must be able to process the cash back amount separate from the purchase amount and must be able to receive and interpret messages from the issuer in case there are restrictions on the cardholder’s account. For EMV devices, the cash back setting must be turned on in the EMV kernel.

Merchants generally aren’t charged additional fees for providing cash back. Since cash back is only offered on debit card transactions, merchants aren’t liable for the same percentages they are with credit card transactions and don’t have any additional costs to pass on to the consumer. However, since all debit card transactions are subject to interchange fees, some merchants impose minimum purchase limits or a nominal fee so that they don’t lose money on low-value debit card transactions made for the sole purpose of requesting cash back. Other merchants may choose to take the hit in the interest of customer satisfaction.

How Does Cash Back Affect Chargebacks?

In the early days of debit card cash back, there were rumors that it could be exploited to steal cardholders’ money without their knowledge. These rumors have persisted and occasionally pop up in chain-letter email warnings and the like.

The premise is that unscrupulous cashiers could add a cash back amount to a customer’s transaction and pocket the cash for themselves, although it would be easy enough to see the cash back amount on the transaction receipt. Most cashiering systems, however, are not configured in a way that would allow this to happen. Typically cash back can only be requested from the customer’s terminal.

On the flip side of this, a concern shared by some merchants is that customers could request cash back and then return to the store and claim that the cashier didn’t give them the correct amount. In some places, customers are required to initial their receipts to indicate that they received the specified cash back amount.

These schemes are relatively infrequent, because terminal logs and security cameras make them easy to uncover. Fraud is much more common when the fraudster can remain anonymous or otherwise protected from the consequences of their actions. Chargebacks specifically related to debit card cash back transactions are therefore uncommon.

What about chargebacks on purchases that incidentally include a cash back amount, however? Fortunately, merchants have specific protections in these cases.

Card networks like Visa require that cash back amounts be assigned unique identifiers in the authorization and clearing messages that keep them separate from the purchase amount.

This allows merchants to reconcile their cash drawers when they receive their card payment batches at the end of the day and allows banks to process chargebacks for purchase amounts without inadvertently including cash back amounts along with them.

Conclusion

For merchants worried that offering debit card cash back will open up new vulnerabilities to chargebacks, the news is good: it’s hard to put forward a valid chargeback against a cash back transaction. The cash back amount should always be excluded from the chargeback amount, leaving the merchant dealing with a situation no different than any other purchase-related chargeback.

In the card-present environment, the rules and required technological security measures go a long way toward screening out invalid chargebacks, especially when compared to the card-not-present world of eCommerce. Card-present merchants who find themselves dealing with a high rate of contestable chargebacks should immediately get busy figuring out why they have a chargeback problem and what steps they need to take to mitigate it.

FAQ