Chargeback Liability, Protection, and Mitigation
Here at Global Legal, our law firm specializes in electronic payments litigation in California and across the United States. We represent independent sales organizations, credit card brands, creditors, processors, and more, and can help you with anything from drawing up contracts to making collections after a judgment.
One of the most common things you’re likely to deal with as a merchant, sales organization, or bank is chargebacks. These are always potential issues with any kind of credit card payments, and it’s important that you have a detailed contract that discusses who will be liable and details any other problems that may be related to them. A lawyer for a credit card dispute can help.
What is a chargeback?
Essentially, chargebacks are refunds that get issued to cardholders after they successfully dispute credit card charges. They can occur with debit cards and credit cards alike, and a disputed charge may be returned for a variety of reasons. These differ from voided charges, which are payments that were never authorized in the first place by the cardholder’s credit card company or bank.
Chargebacks typically occur when a client contacts their credit card company to dispute a charge on their credit card bill. The Fair Credit Billing Act (FCBA) governs the rules over how charges can be disputed. Major credit card issuers, such as Visa, American Express, and MasterCard may have different rules on how the dispute process is handled. Here are some of the most common reasons charges get disputed.
Returned Items: The simplest reason for a disputed charge is when a customer wants to return an item. If the return is within the vendor’s agreed-upon time frame, they can initiate the chargeback themselves. Charges may also be disputed in cases where the customer never actually received the purchased item.
Duplicate/Mistaken Charges: Sometimes technical errors or a merchant mistake can cause a charge to be duplicated. A merchant account might also accept a payment that was never meant to be made in the first place. With incidents of such billing errors, customers will likely need to speak with a customer support agent and provide proof of transaction fees. If a charge was duplicated, they’ll likely need a receipt for the original charge as well.
Credit Card Fraud: This is by far the most complicated type of chargeback case. The FCBA was written mainly to protect consumers from this type of fraud and to enable them to receive refunds for unauthorized charges. Personal information, like credit card numbers and social security numbers, can be stolen by online fraudsters and used for identity theft. Making online payments or using electronic solutions like Apple Pay can lead to credit card information being stolen. Even with consumer protection laws, fraudulent charges using a client’s credit card can be hard to prove, and they may even damage the card holder’s credit score. They may need legal services like attorney credit card processing to fight wire fraud and other such charges.
Who is liable for chargebacks?
Generally speaking, the merchant that initiated the transaction fees will be held liable. If the dispute is successful, then the disputed amount will be taken from the merchant account deemed responsible. If this account can’t cover the disputed amount, then the ISO or salesperson will be liable. Retailers are required to make a good faith attempt to come to a dispute resolution, but if they can’t cover the charge, then liability goes up to the bank that sponsors them. Liability can lead all the way up to the credit card association, but it’s extremely unlikely to happen.
Merchants can be significantly harmed by being responsible for these charges due to chargeback fraud (also known as “friendly fraud”). These are chargebacks made based on fraudulent claims, and there’s actually little risk to the fraudster, even though this is a serious form of credit card fraud.
The good news is that you can fight this type of credit card fraud if you can prove that credit card transaction fees were authorized by the cardholder. One way to do this is to keep meticulous records of transaction fees and deliveries, but the best practice is to prevent fraud from happening in the first place and avoiding the hassle.
The first step in protecting yourself from credit card fraud is to ensure your contract with your credit card processor is a “no liability” or “no risk” deal. At the least, it’s best to ensure that the contract states that sales agents are not responsible for any chargeback risks. You should also make sure the contract doesn’t have any hidden provisions that could leave you open to liability in unusual scenarios.
Our law firm can help you negotiate practices for credit card transactions. We’ll run risk management for you to ensure your legal rights are protected and that you get a contract with your payment processor that works for you and addresses all ethical considerations. This way, you’ll be protected in case of any form of payment and challenges that arise with them. You’ll receive clear copies of documents that protect you under the law.
Sales agents need to be careful about how much chargeback risk they’re willing to incur and what percentage they’ll be paid from the revenue streams of represented merchants as processing fees. Generally speaking, the more risk you take off the merchants, the more fees you can expect to earn. Our law firm is experienced with chargeback risks and can advise you on how much you should incur for each merchant and help you draw up a contract for collections.
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No one relishes the idea of going to court, but our law practice will take legal action and fight for your legal rights in regard to chargeback issues, collections, payments, and general litigations. Contact our San Diego or Los Angeles firms for a consultation and legal advice.