Chargebacks

What is a Merchant’s Liability for Chargebacks?

(Paraphrasing Mr. Paul Rianda, Esq., Transaction World Oct. 2009)

What is a Chargeback?

A typical chargeback situation involves a cardholder who has made a purchase and then contacts the institution that issued the card and requests the transaction be charged back to the merchant and the sale amount credited back to the cardholder’s account. The cardholder may claim the transaction was not authorized, or that the product or service was not what was bargained for, not as represented, or not provided at all.

Let’s suppose for a moment someone has purchased a new flat screen T.V. from an internet based business online. After a couple of months they’ve lost his or hers job and as a result they call the cardholder’s issuing bank and say he or she never got the T.V. To free up additional room on their credit card to pay for essentials, the purchaser could call up the issuing bank to request a chargeback on that purchase even though the T.V. was sitting in the purchaser’s living room.

The purchaser is hoping that the chargeback either won’t be contested or that the merchant will not comply with the rules governing how chargebacks must be contested.

There are very strict time frames that are imposed on a merchant to contest a chargeback. If the merchant doesn’t reply in the required time period, the chargeback cannot be contested and the merchant has to pay the chargeback regardless of whether a merchant has proof-positive that the T.V. in question was delivered.

There are many instances involving merchants that were duped into accepting fraudulent credit card transactions. If all aspects of the sale seem legitimate and valid authorizations are obtained etc. a transaction can still be fraudulent and if the transaction is indeed charged back then the merchant is responsible, no ifs, ands, or buts about it. The merchant is in fact, the guarantor that the transaction is valid, and if for any reason the transaction is not valid, the merchant is liable, assuming there is no valid defense, as there is no requirement of fault on the part of the merchant for a chargeback to occur. The fact is that if there is a chargeback the merchant is liable unless he or she has some defense to the particular situation that falls within the association rules and is able to prove the rules allow the chargeback to be reversed.

What if the merchant simply can’t pay the chargeback? They are then placed on the ‘TMF’ list, Terminated Merchant File, causing the merchant to be unable to accept credit cards, which can indeed put them right out of business.

Where there is a substantial unpaid chargeback, the result to the merchant can be disastrous.

In any event, the customer that made the purchase is protected by this system, while the merchant bears a huge amount of risk for chargebacks.

So the lesson is, even if the merchant does nothing wrong and obtains authorization for the transaction, they still can be held liable for a chargeback months later. Merchants should to the extent possible, ensure that they do everything they can do to try and minimize their potential liability for chargebacks.