What do banks need to know about the chargeback legislation process? Well, from a legal standpoint, there’s actually quite a lot.

We’re going to break down some of the most important chargeback rules, including fees, time limits, and reason codes. We will provide insight into how these regulations differ between card schemes, and help financial institutions to better understand the dispute process from all sides.

What Laws Govern Chargebacks in the US?

Certain regulations known as “chargeback rules” are, in fact, based on legal statutes. The development of the chargeback system was initially a response to policies set by the US federal government. Key legal frameworks that influenced early chargeback policies in the US include:

The Truth in Lending Act (TiLA)

Introduced in 1968 by the Federal Reserve Board, TiLA was a reassurance to bank customers, requiring lenders to clearly disclose loan costs. This act played a part in increasing the acceptance of credit cards.

The Fair Credit Billing Act (FCBA)

Passed in 1974, the FCBA addressed concerns about credit card theft and fraud. It mandated the creation of the chargeback process, limiting customer liability in fraud cases and allowing cardholders to dispute deceptive merchant practices.

The Electronic Fund Transfer Act (EFTA)

Enacted in 1978, EFTA regulates bank responses to consumer complaints and sets liability limits for lost or stolen debit cards. It was a response to emerging technologies like ATMs, electronic POS terminals, and remote banking.

Key International Laws Impacting Chargeback Processes

The US led the world in payment card adoption, and as such, also adopted a leading role in developing chargeback rules and best practices. That said, other pieces of international legislation have also shaped chargeback policies, including:

Section 75

Part of the UK’s Consumer Credit Act, Section 75 is akin to TiLA in the US. However, it differs in key two ways: there is no time limit for filing claims, and both issuers and merchants can be held jointly responsible for transaction disputes (rather than just merchants).

General Data Protection Regulation (GDPR)

Effective in the EU from 2018, the GDPR imposes strict rules on the usage and storage of cardholder data, emphasizing consumer privacy. While it currently affects EU-based merchants, similar regulations, like the California Consumer Privacy Act (CCPA), are being considered in other jurisdictions.

Payment Service Directive (PSD2)

This is a revised directive impacting payment services across the EU, which also influence chargeback processes. As we speak, plans are being made for additional revisions to the Payment Services Directive, which will be known as PSD3.

These are some of the key pieces of legislation and regulation. That said, payment space legislation evolves rapidly, Banks should stay informed about new laws and procedures that might affect the chargeback process, offering timely advice and updates to their merchant clients.

What are the Chargeback Time Limits?

Chargeback time limits are set by card networks such as Visa and Mastercard. While they are not legal mandates, they are enforced with the same rigor.

Each network has strict deadlines for each stage of the chargeback response process, also known as representment. Failing to meet any of these deadlines can result in an automatic loss of the reversal opportunity, with no exceptions.

The deadlines for responding to chargebacks can vary depending on the reason code, the processor, and the card network involved. Generally, cardholders are given more time to file chargebacks than merchants have to contest them. While the rules may differ slightly between card networks, even a day’s difference can be critical.

• Mastercard: Cardholders can initiate a chargeback within 120 days from the transaction date. Merchants have 45 days to respond, excluding the document transit time between parties.
• Visa: Visa allows chargebacks to be filed within 120 days, but their countdown starts the day after the transaction date.
• American Express: Previously, Amex had no time limit for disputes, but now they enforce a 120-day limit. This limit’s start date varies based on the reason code.
• Discover: Discover permits chargebacks up to 120 days after the transaction, but merchants must submit their initial response within just 20 days.

Understanding these time limits is crucial for merchants. It’s also important for FIs to advise clients accordingly to ensure they don’t miss critical deadlines in the chargeback representment process.

What is a Chargeback Ratio?

In the context of banking and merchant services, a chargeback ratio is a metric used to evaluate the frequency with which a merchant experiences chargebacks. This number is in relation to the total number of transactions processed. It’s an essential tool for assessing a merchant’s risk level from a financial perspective.

To calculate the chargeback ratio, you divide the total number of chargebacks in a given period (usually a month) by the total number of transactions in the same period. This ratio is typically expressed as a percentage. For example, if a merchant had 5 chargebacks and 1,000 transactions in a month, their chargeback ratio would be 0.5% (5 ÷ 1,000 = 0.005 or 0.5%).

It’s important to note that card schemes do not all calculate chargeback rates the same. Visa divides one’s monthly chargebacks by the number of transactions processed during the same month. In contrast, Mastercard divides by the number of transactions processed in the previous month.

Merchants will also not have one singular chargeback ratio. They will have a unique figure for each card scheme. All of the merchant’s chargeback rates must be kept under the threshold imposed by card scheme rules.

What are the Rules for Fighting Chargebacks?

When advising merchant clients on how to handle chargebacks, banks play a crucial role in guiding them through the intricacies of the process. Merchants have only one recourse when they decide to challenge an incoming chargeback: representment.

During this process, the merchant is effectively “re-presenting” the transaction that their customer disputed to legitimize the original charge. This can be a lengthy and time-consuming process, and your clients may ask for guidance.

Here are a few tips to help your clients through representment.

Educate About Chargeback Reason Codes

Inform merchants about the various chargeback reason codes and their implications. Understanding these codes is essential for merchants to prepare the appropriate response and evidence.

Advise on Evidence Collection

Counsel merchants on gathering relevant evidence based on the chargeback reason. This may include transaction receipts, proof of delivery, customer communications, and terms and conditions documentation.

Emphasize Timeliness

Stress the importance of responding to chargebacks within the stipulated timeframes set by card networks. Failure to meet these deadlines can result in an automatic loss of the dispute.

Guide on Compelling Evidence Submission

Assist merchants in compiling clear, concise evidence that directly addresses the chargeback reason. Offer insights on what constitutes compelling evidence for different types of disputes.

Update on Card Network Guidelines

Keep merchants informed about various card networks’ specific rules and guidelines. Since these can differ, tailored advice based on the networks the merchant uses is crucial.

Alert on Chargeback Fraud

Educate merchants about the prevalence of chargeback fraud, also known as “friendly fraud,” and advise them on measures to detect and combat it.

Promote Good Record-Keeping Practices

Encourage merchants to maintain detailed and organized records of all transactions and relevant communications. This practice is vital for effective chargeback disputes.

Analyze Chargeback Trends

Offer to help analyze chargeback cases to identify any trends or operational areas needing improvement, reducing future disputes’ likelihood.

Train Merchant Staff

Suggest or provide training for merchant staff in transaction processing, customer service, and chargeback procedures to minimize errors and misunderstandings leading to chargebacks.

This process can help banks empower their merchant clients to navigate chargeback disputes effectively, ultimately protecting their revenue and maintaining good standing with payment processors and card networks. Keeping abreast of evolving chargeback rules and regulations is also crucial for banks to provide up-to-date advice.