History of Chargebacks From 300 BC to 2024

To combat chargebacks as a business or learn about your rights as a customer, you’ll need to know how chargebacks (aka disputes) came to be.

And that’s what I’ll cover in this guide.

Let’s start in the year 300 BC.

Key Historical Events

• In 1899, the first documented instance of credit card fraud occurred.
• The Fair Credit Billing Act of 1974 established chargebacks.
• The Electronic Fund Transfer Act of 1978 extended consumer protections to electronic transactions.
• In 1998, EMV chip technology reduced counterfeit fraud in card-present transactions.
• The rise of e-commerce between 2010 and 2015 led to increased data breaches, impacting online transactions.

1. The Early Days of Chargebacks (300 BC – 1940s)

This timeframe introduced the concept of fraud and the implementation of credit cards in everyday life. We’ll get into chargebacks more in the late 1900s and early 2000s.

300 BC: First Recorded Instance of Fraud

Hegestratos, a sea merchant, devised a plan secured a bottomry, a loan for his ship and cargo.

The terms:

• Successful delivery meant repayment with interest
• Failure meant forfeiture.

His intentions were different, though.

He planned to sink his empty vessel, sell the corn separately, and keep the loan.

His crew caught onto his scheme and began pursuing him. During this chase, Hegestratos drowned.

This marks an early instance of attempted fraud. Specifically first-party fraud.

1899: The First Instance of True Fraud

For context, Edward Bellamy coined the term “credit card” in 1887 when writing his novel Looking Backward [1]. Some sources suggest that department stores implemented their predecessors (charge coins) in 1865.

A little over a decade later, in 1899, the first reported instance of credit card fraud happened. Some livestock commission man threw his credit card in the trash because he thought it had no value. However, a fraudster dug through the trash and charged it $25.

According to a calculator I found, that would be worth $944.42 in 2024 [2].

1946: Introduction of the Charg-It Card

The bank acted as an intermediary in transactions. Initially, it covered the cost of items purchased by the consumer. Then, the cardholder reimbursed the bank.

Source: LinkedIn

The bank acted as an intermediary in transactions. Initially, the bank covered the cost of items purchased by the consumer. From there, the cardholder reimbursed the bank.

The Charg-It card's use remained limited to local transactions and was exclusively available to the bank's customers. This also development paved the way for future advancements in credit card technology and financial services.

2. The Rise of Credit Cards & Increased Fraud (1950s – 1970s)

Due to the rise of credit cards, customers needed more protection from fraudsters and lenders. That led to legislation and innovation in technology.

1958: Introduction of BankAmericard

1949 came, and Ralph Scheider created the Diners Club credit card. Then, Bank of America (BOA) saw the implementation of both cards and wanted to get into the credit card game. That’s when they debuted their BankAmericard in 1958.

This card gave customers $300 – $500 in instant credit.

BOA needed a way to market this card. To do this, they sent the card (unsolicited) to around 60,000 Fresno, California residents. I couldn’t find any statistics on the percentage of those who received the card who became customers.

It must have been successful, though. As in 1976, BankAmericard became Visa, the current most popular credit card provider.

10 years later is when things get more interesting, though.

1968: Formation of the Interbank Card Association

In 1966, a network of 14 banks formed the Interbank Card Association (ICA). In 1969, the group renamed itself Master Charge. By the ‘70s, it had been renamed once more Mastercard International.

Anyway.

The Federal Reserve Board implemented The Truth in Lending Act (TILA) in 1968.

The goal of this act was to protect consumers by requiring lenders to provide information like:

• Interest rate fees
• Total amount repayments
• Credit terms

TILA's implementation stemmed from concerns about deceptive lending practices and hidden costs. The act standardized disclosures, promoting fairness and competition in the lending market.

This legislation helped consumers by encouraging a more transparent and equitable credit landscape.

It, in part, contributed to chargeback implementation.

Another thing happened this year, though. IBM introduced magnetic stripe technology.

This encodes cardholder data onto a magnetic strip on the back of payment cards. It allows for quick and secure reading of card information at payment terminals, streamlining the transaction process. And it’s what’s used in fraud prevention today.

1974: The Implementation of Chargebacks

The Fair Credit Billing Act (FCBA) of 1974 gave consumers the ability to dispute billing errors on their credit card statements. This led to the chargebacks (aka disputes) that merchants deal with today.

The rights in this legislation includes:

• Shoppers have 60 days to dispute a transaction that’s $50 or more after receiving a bill.
• Customer banks (issuers) have 30 days to respond to the consumer’s response.
• Issuers must represent the consumer and correct the error.
• Buyers can challenge judgements within 10 days of the result.

The FCBA also restricts creditors from reporting disputed charges as delinquent to credit bureaus while under investigation. Meanwhile, creditors can’t hurt a consumer’s credit rating during a dispute.

From hereon, we’ll mostly see advancements in e-commerce, new forms of fraudulent transactions, and implementation of technology to combat such fraud.

1978: Electronic Fund Transfer Act

The Electronic Fund Transfer Act (EFTA) establishes comprehensive consumer protections in electronic fund transfers (EFT). It’s like the Fair Credit Billing Act but for debit card transactions.

EFTs encompass transactions like:

• ATM withdrawals
• Debit card payments
• Direct deposits
• Electronic bill payments
• Point-of-sale (POS) terminals
• Remote banking
• Automatic clearinghouse (ACH)

These also include transactions made over the phone, electronic terminals, magnetic strip or card scans, and computers. Over time, such transactions have included those made using prepaid cards.

It requires institutions to provide customers with clear and understandable disclosures about their rights, responsibilities, and liabilities regarding EFTs. It also outlines procedures for error resolution, ensuring consumers can dispute unauthorized or incorrect transactions.

Furthermore, EFTA limits consumer liability for unauthorized EFTs, requiring prompt reporting of lost or stolen cards. It also restricts preauthorized transfers, allowing consumers to easily stop recurring payments.

3. The Rise of E-commerce & New Payment Methods (1990s – Present)

That’s technically the history of when chargebacks for credit and debit cards were invented. So you could stop reading here while knowing what you need to know.

However, maybe you’ll want to know how these laws did. Also, how fraudsters adapted to them. Because to understand a fraudster, you’ll need to understand how they think.

1998: Implementation of EMV

In the 1980s, magnetic stripe technology became vulnerable to fraud. Criminals easily copied card data, exploiting the lack of encryption.

In response, Europay, Mastercard, and Visa (which formed the acronym EMV) introduced a new standard in 1993. EMV chips offered enhanced security through encryption and two-factor authentication (chip and PIN).

Discover joined this alliance in 2013 and JCB in 2009.

This technology reduced counterfeit fraud, particularly in card-present transactions, by over 87% [3]. Visa reported this number after the implementation of version 4.3 in 2011. I couldn’t find specifics on how much it lowered fraud before that date.

To incentivize adoption, card networks shifted liability for fraud to merchants lacking EMV-compatible terminals. This meant businesses bore the financial burden of fraudulent transactions if they hadn't upgraded their systems.

This move spurred widespread adoption of EMV technology, improving overall security in the payments industry.

2010: Rise of Friendly Fraud

Come 2010 and before 2014, court files for a case against Facebook suggested that children were blowing their parents’ money on Facebook games without the parents’ knowledge [4].

This led to a 9% chargeback rate for Facebook.

And the rise of friendly fraud, where the cardholder unknowingly commits fraud. Or their card isn’t stolen, but it’s still an unauthorized transaction done on their card.

At this time, games like Angry Birds also saw refund rates of 5 – 10% for credits spent in the game.

Due to the rise of such games, and mobile games with microtransactions, chargeback rates have likely risen from similar situations since then.

2010 – 2015: E-Commerce and the Rise of Data Breaches

Due to the rise of e-commerce companies like Amazon, Shopify, Etsy, eBay, etc., more people began shopping online. Because of this, companies needed to store all of their data. What happens if this data is poorly managed?

Hundreds of millions of customers’ data gets leaked.

Let’s take a look at some major data leaks in this timeframe:

• Target (2014): 70 million customers were affected.
• Adobe (2014): More than 38 million active users were affected.
• Staples (2014): 1.16 million shoppers affected.
• eBay: 145 million users’ account information was leaked.

This data likely goes to the dark web, where hackers will sell customers’ data to whoever. From there, “whoever” will use the data to hijack a customer’s account or use their payment details to make fraudulent transactions.

And if you’re a merchant, you have the lowest chance of winning a chargeback stemming from fraud.

2016 – The Present

Since the previous years, nothing substantial has happened other than the addition of more data protection laws and improvements in the overall chargeback process.

Let’s explore some of those landmarks:

• Visa Claims Resolution (2018): Removed a lot of legacy codes and made the dispute process easier for merchants and customers.
• Mastercard Dispute Resolution initiative (2018): Overhauled the chargeback process to simplify it.
• General Data Protection Regulation or GDPR (2018): Limits how companies can store and handle consumer data.
• Mastercard acquires Ethoca (2019): This allowed Mastercard to offer chargeback alerts.
• COVID-19 (2020): Chargeback rates skyrocketed to 70% because of canceled travel plans, leading to an increase in cybercrime since more people shopped online [5].

And that’s all there is to the history of chargebacks, and fraud in general.

Wrapping Up

The knowledge of how fraud and chargebacks came into existence can help you, as a business, combat it. Or if you’re a customer, this knowledge could help you realize how your rights have built up over the years.

If you’re a business and want to reduce your chargebacks, knowing the history of it isn’t enough, though. You’ll need preventative measures. Alerts from providers like Ethoca can help.

We partner with Ethoca, Visa’s RDR, and CDRN to make the implementation of these alerts easier. Learn more about how we can help you reduce chargebacks.

Sources

• [1]: Mesacc: Credit card history (PDF file)
• [2]: In 2013 Dollars: Cumulative price increase
• [3]: Visa: EMP chip introduction
• [4]: Forbes: Increase in friendly fraud on Facebook
• [5]: Ethoca: Chargeback increase due to COVID-19