The payments industry will see operational changes throughout its value chain. Here we highlight the
operational changes we expect to see at acquirers, banks, merchants, and networks.

1. Acquirers

Banks and acquirers would have to re-formulate and re-write their risk and underwriting policies to consider not just the TSR but many other industry-specific laws. These changes will materially impact acquirers’ operations.

Beginning with underwriting, acquirers would now be required to complete substantially increased due diligence of every potential new merchant. All acquirers would likely revise their risk policy and underwriting operations to include stricter evaluation of each merchant’s business model and its compliance with all applicable laws. For example, the up-front diligence requirement (per Visa and MasterCard guidance) of a “detailed business description” might be replaced by a required site visit to the merchant’s call center or operating location or the requirement that underwriters scrutinize or audit every business. Acquirers today do not have the level of knowledge and experience necessary to support this level of due diligence. It is our expectation that acquirers would be required to build new capabilities or use third parties with knowledge of specific industries to perform initial and ongoing due diligence.

Diligence would now need to include merchants’ operations to ensure compliance with laws and regulations not monitored by acquirers today such as the TSR and other laws specific to each industry served by the acquirer. This due diligence may need to include periodic audits and investigations into business contacts, contacting and surveying the merchants’ customers, and mystery shopping.

This would require highly skilled and experienced staff, which will be costly and result in expenses being passed on to merchants and, ultimately, to consumers in the form of higher prices. Today, the average time from receipt of merchant application to approval is one day. The time to underwrite a merchant application would significantly increase even if an acquirer chooses not to service telemarketing or other card-not-present merchants. We can easily see the time to underwrite a merchant increasing by 300% to 500% and the cost increasing in a similar fashion.

Operational consequences would not stop in the underwriting back-office. Sales staffs would need to be informed and educated about underwriting requirements. Portfolio managers would likely need to examine their existing books of business for examples of merchants that might now fall under the new policies. Numerous legal businesses across the U.S. may be displaced from the payments system and forced to accept only cash and checks.

Ongoing risk management would face similar, additional operational requirements to reconfirm the diligence done during the initial underwriting process. Ongoing “triggers” would need to be updated to include merchants that may not meet Visa and MasterCard definitions for high chargeback merchants as well as merchants that may now be in violation of any number of federal, state, or local laws. In short, acquirers would need to work through a process of revising their pre-existing risk policies, operations, and procedures, which would have a ripple effect through the rest of their businesses, increasing overall time and cost to underwrite an account.

2. Merchants

Merchants would be required to make operational changes if the FTC continues with its current actions. Today, only a very small percentage of merchants are required to post reserves in order to process credit card transactions. With few exceptions in high-risk verticals, virtually all accounts across the industry are unsecured. The FTC’s proposed actions would likely change that and make it more difficult for merchants to gain access to the electronic payment system. Today, most merchants in the U.S. are paid credit card receipts one to two business days after transactions are processed. Other countries take up to thirty days to pay the merchant. Acquirers in the U.S. would likely want to hold merchant funds longer as a risk mitigation strategy, which will impact the cash flow of merchants, especially small businesses that have limited access to credit. These factors would impact small business cash flow and borrowing needs.

In addition to potentially being required to post collateral and suffering from delayed settlement, merchants may be subject to invasion of their business privacy by their merchant processors as merchant processors will need to audit the business to validate compliance with laws. This will impact businesses that incur the costs of the audit and distraction of their key personnel.

3. Networks

In response to FTC actions, the Card Networks will likely implement more restrictive rules and penalties. First, this could entail higher capital requirements to achieve the principal acquirer status needed to be an acquiring member bank. Alternatively, additional capital could be required to process merchants in certain industries that are considered higher risk. “Higher risk” in this sense would not be based on traditional risk models and experience, but rather defined as the potential for government actions, fines, and penalties.The Card Networks may also restrict acquirers from serving certain industry verticals, require collateral to protect the payments system, or implement higher pricing at the network level.

The FTC’s Potential Impact on the Merchant Acquiring Industry Prepared for the Electronic Transactions Association
First Annapolis Consulting, Inc.
July 15, 2014

The post FTC & Operational Changes appeared first on Chargeback Advocates.

The FTC’s effort to expand an acquirer’s responsibility changes the basic nature of the acquirer’s role, forcing acquirers to pass judgment on the legality of a merchant and the potential deceptive nature of its business. This effectively mandates that acquirers become the police force for merchant activity, which is not a role acquirers desire or are equipped to handle today.
From a risk manager’s perspective, we need not go much further than the possibility that FTC action opens the door for other legal judgments of processor liability to believe that acquirers would begin modifying their risk practices accordingly. Rightly or wrongly, the risk manager might believe that due to FTC legal actions, its risk exposure has increased significantly. Further, risk mitigation techniques such as cash collateral cannot be relied on since the FTC has the power, and uses it, to require the merchant acquiring bank to forfeit all held reserve funds to the FTC. Despite the fact that acquirers hold merchant reserves for the purpose of repaying consumers that dispute transactions with that merchant, the FTC has mandated that acquirers forfeit reserve funds directly to the FTC.

Depending on how wide one believes the precedent set by this type of action would extend, industry-wide risk exposure could increase by a factor of ten or more. Exposure is calculated by acquirers using a combination of information such as chargeback and credit refund history, dollar volume processed, timing between purchase and delivery, and timing between purchase date and chargeback or return. The overall industry holds nearly $22 billion in credit risk exposure today based on existing Card Network rules, but that could increase to $258 billion if acquirers were held liable for all transactions instead of just those disputed.

Now, instead of simply prohibiting outbound telemarketing merchants in the portfolio, as many acquirers do today, an acquirer might think twice about signing inbound telemarketing merchants as well, or perhaps even certain types of e-commerce businesses. The acquirer will change its operations for underwriting and monitoring. What initially seems to be a relatively modest project to revise risk and monitoring rules associated with outbound telemarketing merchants will quickly become a large scale overhaul of the acquirer’s practices across the entire merchant acquiring value chain including sales,underwriting, pricing, and ongoing risk management for multiple industry verticals.

The FTC’s Potential Impact on the Merchant Acquiring Industry Prepared for the Electronic Transactions Association
First Annapolis Consulting, Inc.
July 15, 2014

The post Increased Exposure appeared first on Chargeback Advocates.

The FTC may consider legal action that would seek to hold acquirers liable for “assisting and facilitating deceptive and abusive telemarketing acts or practices” per the Telemarketing Sales Rule, 16 C.F.R. §310.3(b) or under other legal theories. As we understand it, the FTC believes acquirers should be held liable for all sales processed by a merchant during the course of the merchant’s business relationship with an acquirer regardless of whether the cardholder actually disputed a transaction. The industry is not designed by the Card Networks to operate in this manner, and acquirers are not guarantors to consumers or merchants except when a transaction has been disputed.

The decision to include acquirers as defendants would not only have deleterious impacts on individual acquirers but on the payment card acquiring industry as a whole. An increase in risk exposure (real or perceived), or potential losses due to merchants acting in violation of federal law, and the subsequent internal policy and procedure modifications related to this increase, is only the tip of the iceberg with respect to this proposed action. The industry reaction will result in acquirers revising their risk modeling and risk policies, which would ripple through to other participants in the payments value chain, namely merchants and consumers. To some extent, this has already begun.

Primary among these impacts would be the incremental risk of losses that merchant acquirers, sponsor banks and, ultimately, the payment Card Networks, would be exposed to. The fact that acquirers will need to respond to this increased risk will change acquirers’ business operations at a macro level. Simply put and as described in Section III: Industry Risk Overview the industry today manages risk based on a well defined set of factors. Suspicion that any acquirer is responsible for a violation of the TSR (or any number of federal, state, or local laws) committed by a merchant, especially when there is no involvement by the processor in the merchant’s business, would single-handedly increase the risk exposure of all participants across the entire payments industry.

The FTC’s proposed course of action would cause all acquirers to re-examine their risk since exposure would increase from a small percentage of recent sales to all sales since inception of each merchant that may violate federal law. This would result in changes to underwriting policies, sales processes, credit fraud management rules and processes, and ongoing business decisions. It is our belief that the increased operational burden will be felt by all acquirers due to the fact that acquirers will need to go to greater lengths to validate or audit merchants’ business models.

The FTC’s Potential Impact on the Merchant Acquiring Industry Prepared for the Electronic Transactions Association
First Annapolis Consulting, Inc.
July 15, 2014

The post FTC’s Proposed Action appeared first on Chargeback Advocates.

1. Destabilization of Payment Network

Acquirers today process over 25% of the entire U.S. GDP with a total exposure (as calculated using today’s risk models) of $21.5 billion. Should the FTC actions continue, there will be systemic changes along the entire payments value chain starting with the destabilization of the payments network. The ultimate responsibility of exposure resides with the Card Networks. Today, Card Networks, primarily Visa and MasterCard, are the final backstop to ensure the payments system does not collapse. If the non-bank acquirer is unable to absorb the chargeback and return losses due to bankruptcy, the liability moves to
the sponsor bank. If the sponsor bank is unable to absorb the loss, the liability shifts to Visa or MasterCard (i.e., the Card Network). Using today’s risk exposure models, the total industry exposure is currently 3.5 times Visa and MasterCard’s combined 2012 operating income. If overall industry exposure increased to $258.2 billion (if exposure were recalculated for all Visa/MasterCard card-not-present transactions), then the exposure to operating income ratio would increase to 42.5x, causing a severe destabilization of the entire payments value chain and risking 25% of the U.S. GDP.

2. Removal of Certain Industries from Payment Network

Acquiring industry leaders could adjust to the new risk environment by eliminating certain industries in which they do business today. This would include outbound telemarketing specifically, but may also include other telemarketing industries as well as any industry that sells a product that could naturally lead to higher disputes such as health and wellness, vitamins and supplements, pharmacy, and credit repair. Acquirers may even be less inclined to provide services to merchants that operate in an environment where the card is not present during the transaction, since the chargeback rules are more in favor of the
cardholder, or industries in which payment takes place prior to delivery of goods and services. This would encompass a significant segment of the acquiring industry to include all e-commerce, MO/TO, airlines, and furniture stores, for example.

E-commerce makes up almost 5% of total U.S. GDP, with roughly $118 billion in bankcard volume, and is expected to grow by 10% a year through 2016. The expected U.S. GDP growth according to the World Bank is 2.76% over the next five years. The expected growth rate drops to 2.37% if there is no growth in the e-commerce sector (based on First Annapolis analysis), which is possible if e-commerce merchants were prohibited or restricted from accepting cards either by acquirers’ unwillingness to process for cardnot-present merchants or the inability of some e-commerce merchants to absorb the price increase. Removing certain merchants from the current payments value chain would create a void that would either
not be filled (impacting the economy) or would be filled by less experienced, smaller, and under capitalized acquirers unable to manage the risks (impacting the viability of the payments network) or by off-shore bank acquirers that are not subject to U.S. jurisdiction.

3. Change in the Fundamental Role of Acquirers

The role of acquirers and processors would change based on the precedent of holding acquirers responsible of all transactions processed by a merchant client despite the processors’ role being limited to that of a credit card factoring service provider. The acquirers’ new role would now include the requirements to opine on the potential deceptive nature of a merchant’s business practice and its compliance with all federal, state, and local laws on an ongoing basis, well outside of its responsibility today. Effectively, acquirers are being mandated by the FTC to police merchants.

4. Change in the Competitive Environment

Smaller acquirers may opt to not serve one or many merchant verticals due to fear of government penalties or the increased cost of doing business, thereby granting large acquirers an oligopoly. New risk management costs and requirements may present barriers to entry for new players in a market that has experienced a large number of new and innovative players in the recent past (e.g., Square, Braintree,Groupon). Any of these changes would have a severe impact on the highly competitive merchant acquiring market.

5. Exit of Sponsor Banks

Today, sponsor bank fees average only about $0.01 per transaction. It is our belief that this pricing does not completely account for the risk sponsor banks absorb even today, and with a change in exposure, it is likely that the small number of sponsor banks that are in the market would be further reduced. As current Visa and MasterCard regulations require a sponsor bank for non-bank acquirers, the exit of sponsor banks will cripple the acquiring industry.

The FTC’s Potential Impact on the Merchant Acquiring Industry Prepared for the Electronic Transactions Association
First Annapolis Consulting, Inc.
July 15, 2014

The post Impacts to Payments Value Chain appeared first on Chargeback Advocates.

It is our expectation that a perceived or real increase in risk exposure will dramatically increase pricing to
all merchants (and merchants will pass that increased pricing on to consumers). We believe the increase
in pricing will come from three main sources: increase in risk exposure, the incremental operational
support, and insurance premiums.

1. Pricing Increases Due to Increase in Risk Exposure

Acquirers expect a certain average losses-to-exposure ratio under the current risk environment.
Assuming that ratio would stay roughly the same in an environment of increased exposure to risk,
acquirers would have no choice but to increase pricing to cover the increased exposure (and, therefore,
increased losses). These price increases from acquirers to merchants would most certainly be passed on
to consumers in order to cover the increased cost of card acceptance. While it is impossible to predict
exactly how this would be implemented, it may come in the form of surcharging for payments made with
cards or an overall increase in a merchant’s price of goods.

First Annapolis looked at four potential scenarios of increased exposure. As a baseline case, we applied 2013 industry bankcard volumes to a standard exposure model in order to assess how much exposure is in the market today, resulting in a calculation of 86 bps of exposure compared to an average loss rate of about 1.5 bps (approximately a 57 to 1 ratio). The second scenario looks at what pricing impact would result from the most conservative application of the FTC’s proposal (i.e., an acquirer is now exposed to the entire volume of telemarketing transactions, not just chargeback volume). In this scenario, an acquirer would be potentially liable for the face value of all transaction volume, past and future, for an individual merchant in the telemarketing industry. If exposure were calculated based on 2013 industry volume, then total exposure increases by $1.4 billion, resulting in a pricing increase of 0.1 bps. Applying that increase in pricing across the entire industry (and assuming the increase is directly passed on to consumers), consumers would pay an additional $26 million annually for products and services.

If, however, there are more significant risk exposure changes in the industry (as we expect) and acquirers
adjust their models to calculate exposure for all MO/TO or all card-not-present transactions, pricing could
increase to an average of 44 bps or 54 bps, respectively, which would result in merchants (and
consumers) paying an extra annual amount of $1.5 billion or $4.1 billion, respectively, for goods and
services.

Finally, we contemplated a scenario in which acquirers would face exposure for 100% of all volume processed for all merchants, or 10,000 bps of exposure, meaning acquirers have a contingent liability equal to all card sales for all merchants in their portfolios. While this is not contemplated by the industry today as a realistic risk, the FTC’s actions set a precedent for any other government agency of any form to hold acquirers liable for the actions of its merchants. This exposure translates into aggregate pricing increases of almost $43 billion annually for consumers.

2. Increase in Pricing Due to Required Operational Changes

Changes to the acquirer’s liability and risk exposure will result in incremental infrastructure over what is in
place today. This will increase the cost of providing processing services. First Annapolis estimates that
the change in risk exposure will double to triple the cost of on-boarding and monitoring each merchant
account. That translates to 3 to 6 bps of additional cost for each merchant.

3. Increase in Pricing Due to Additional Insurance Requirements

Acquirers will consider purchasing insurance to offset the additional risk of loss. This cost would ultimately
be passed on to merchants and consumers. We estimate this could increase pricing 0.5 to 1 bps.

4. Total Pricing Increase

Merchants are likely to see pricing increases of between 9% and 61%. As discussed previously, these
pricing increases will be passed on to the consumer, which will see collective pricing increases of
$900 million to $5.9 billion annually.

Small Merchant Pricing Increases

An increase in acquirer pricing will not be felt equally by all businesses, and it is almost guaranteed that small merchants will be disproportionately impacted by pricing increases. Net Spread by Merchant Size, merchant pricing and average merchant size have an inverse relationship, with small merchants paying much higher acquirer fees in terms of bps on volume than large merchants.

According to the Small Business Administration, small businesses account for nearly half of U.S. economic output. Additionally, according to U.S. Census data, nearly half of Americans are employed by small businesses, and small businesses represent 99.7% of all businesses. This data does not include non-employer businesses, which would add another 22 million employees to the “small business” pool. It is likely that this disproportionate pricing increase on small merchants will have far reaching negative consequences to a substantial part of the U.S. economy. While the average industry net spread is 38 bps,
merchants that have less than $10 million in annual volume contribute 70.1% of that net spread.

Due to the contractual and other pricing vagaries within the industry, we expect that small merchants
(merchants with less than $10 million in annual Visa/MasterCard volume) will bear most, if not all, of the
increase in pricing.

In response, merchants may re-evaluate the extent to which they accept cards as a form of payment.
Currently, just under 50% of consumer spend is on credit and debit cards, and the FTC’s proposed
changes could result in an unknown impact on tender mix at individual merchants as well as in the
economy at large.

The FTC’s Potential Impact on the Merchant Acquiring Industry Prepared for the Electronic Transactions Association
First Annapolis Consulting, Inc.
July 15, 2014

The post FTC & Potential Pricing Increases appeared first on Chargeback Advocates.

This paper discusses the qualitative and quantitative impact of the Federal Trade Commission’s (“FTC”) potential aggressive actions against card-based payment transaction processors and merchant acquirers (herein referred to as “acquirers”) and models at a high-level the potential financial impacts of those actions on the broader market.

First Annapolis is a management consulting firm focused exclusively on the payments industry. For over 20 years, First Annapolis has specialized in advising clients on payments-related strategies, products, and services; the First Annapolis practice areas serve all stakeholders in the payments industry.

First Annapolis is able to leverage the knowledge gained by having teams dedicated to every link of the payments value chain. First Annapolis clients include the most prominent financial institutions, retailers,manufacturers, merchant acquirers, transaction processors, payment networks, government entities, and affinity organizations throughout the world. First Annapolis is well versed in risk management, risk operations, risk and fraud management policies and procedures, and many other issues impacting acquirers on a day-to-day basis.

The FTC is considering potential action against acquirers and processors alleging that the acquirers in specific cases are abetting merchants engaged in illegal activity by processing transactions while knowing, or consciously avoiding knowing, that the merchant was violating the Telemarketing Sales Rule (“TSR”) or that the acquirer’s conduct was otherwise illegal. The TSR has traditionally been applied to merchants rather than to those that support merchant operations. However, the emerging trend from the FTC is to sue and penalize the acquirers that are processing the transactions for merchants who violate the TSR.

Through these actions, the FTC would have acquirers effectively repay consumers for transactions consumers conducted with merchants. For clarity, the acquirers were not a party to these transactions; they simply provided electronic payment services to make the payment more convenient for the consumers and merchants in return for a small fee. The consumers were unaware of who the acquirer was and had no expectation that a third party would provide any form of guarantee or repayment if goods or services did not meet expectations. The FTC’s expectation that the acquirer should repay consumers for transactions that were not even disputed is far outside the long-established operating model utilized in the card-based payments industry.

Electronic Transactions Association

I. Introduction 2

In some of the recent FTC investigations, the merchant acquirer appears to have conducted ample upfront due diligence and performed ongoing credit monitoring that is in line with industry standards but failed to identify that the merchant provided false information (such as covering up the fact that the merchant was selling debt relief services in violation of the TSR). In other instances, in the view of the FTC, the acquirer may not have conducted sufficient upfront diligence on the merchant to identify potential consumer harm or the acquirer failed to act on potential red flags such as Better Business Bureau scores. Seeking to impose liability in these types of fact scenarios raises significant issues for the acquiring industry and the economy as a whole.

Acquirers are service providers, and in that capacity they contract with businesses to provide access to the electronic payment card networks such as Visa, MasterCard, American Express, and others (“Card Networks”); facilitate payment card transactions over those networks; and settle sales made via payment cards to their merchant-customers’ bank accounts. In the same way that an office supply company or an electric utility is not required to audit the use of the product or service, acquirers are not, as service providers, based on the current Card Network rules, required to perform a comprehensive review of the business practices of their customers to ensure compliance with each individual law or regulation applicable to the merchants’ business.

Acquirers are also not specifically restricted from doing a comprehensive business review or audit of a prospective merchant applicant, but competitive pressures limit the information that merchants are willing to share and access they are willing to provide. It is our view that the possible actions by the FTC will set a precedent detrimental to merchant acquirers, as well as business service providers more generally, and be detrimental to society in that it will create a supply disruption to merchants who are ethical and honest but now will bear the higher costs as acquirers who cannot cost effectively monitor the additional risk, or choose not to, will simply avoid the risk for large groups of potential customers, potentially leaving many businesses without access to electronic payment acceptance.

Including acquirers as defendants in FTC lawsuits will result in significant impacts on the business practices of merchant acquirers, including what acquirers charge their merchants and what types of merchants the acquirers choose to serve. This paper will lay out our views on the harmful consequences likely to impact merchant acquirers, small businesses, and the economy more generally should the FTC continue with its current initiative.

The FTC’s Potential Impact on the Merchant Acquiring Industry
Prepared for the Electronic Transactions Association
First Annapolis Consulting, Inc.
July 15, 2014

The post FTC & the Merchant Acquiring Industry appeared first on Chargeback Advocates.

Chargebacks also occur in the distribution industry. This type of chargeback occurs when the supplier sells a product at a higher price to the distributor than the price they have set with the end user. The distributor then submits a chargeback to the supplier so they can recover the money lost in the transaction.

United States overview:

The chargeback mechanism exists primarily for consumer protection. Holders of credit cards issued in the United States are afforded reversal rights by Regulation Z of the Truth in Lending Act. United State debit card holders are guaranteed reversal rights by Regulation E of the Electronic Fund Transfer Act. Similar rights extend globally, pursuant to the rules established by the corresponding card association or bank institution.

A consumer may initiate a chargeback by contacting their issuing bank, and filing a substantiated complaint regarding one or more debit items on their statement. The threat of forced reversal of funds provides merchants with an incentive to provide quality products, helpful customer service, and timely refunds as appropriate. Chargebacks also provide a means for reversal of unauthorized transfers due to identity theft. Chargebacks can also occur as a result of friendly fraud, where the transaction was authorized by the consumer but the consumer later attempts to fraudulently reverse the charges. Card association chargeback rules (e.g., MasterCard) are available online for public inspection and review. They comprise a well developed, well crafted and efficient system for transaction disputes between cardholder’s and merchants, primarily where the issues can be resolved based on documentary evidence incident to the transaction. The rules provide for arbitration of issues by the card association.This may occur where the card issuer generates a second (or “pre-arbitration”) chargeback against the merchant, after receiving the merchant’s response to the initial chargeback. Normally this would require the cardholder to rebut elements of the merchant’s response. The second chargeback results in a second crediting of the cardholder’s account for the disputed funds, after having been credited back to the merchant with its response to the initial chargeback. The merchant’s only recourse after the second chargeback is to initiate arbitration of the dispute by the card association. The fee for this in the order of $250.00 to $500.00, and the arbitration loser is then obligated to pay the costs of the arbitration.

Reason Codes:

With each chargeback the issuer selects and submits a numeric reason code. This feedback may help the merchant and acquirer diagnose errors and improve customer satisfaction. Reason codes vary by bank institutions, but fall in four general categories:

• Technical: Expired authorization, non-sufficient funds, or bank processing error.
• Clerical: Duplicate billing, incorrect amount billed, or refund never issued.
• Quality: Consumer claims to have never received the goods/merchandise as promised at the time of purchase.
• Fraud: consumer claims they did not authorize the purchase or identity theft.

One of the most common reasons for a chargeback is a fraudulent transaction. In this case, a credit card is used without the consent or proper authorization of the card holder. In some cases, a merchant is responsible for charges fraudulently imposed on a customer. Fraudulent card transaction often originate with criminals who gain access to secure payment card data and set up schemes to exploit the Chargebacks can also result from a customer dispute over statement credits. For example, a customer

may have returned merchandise to a merchant in return for credit, but credit was never posted to the account. A dispute may also arise if a customer does not receive items they have paid for. In these examples, the merchant is responsible for issuing credit to its customer, and would be subject to a chargeback. Other types of chargebacks are related to technical problems between the merchant and the issuing bank, for example when a customer was charged twice for a single transaction. Other chargebacks are related to the authorization process of a credit card transaction, for example, if a transaction is declined by its issuing bank but the account is still charged.

Merchant Recourse:

For transactions where the original invoice was signed by the consumer, the merchant may dispute a chargeback with assistance of the merchants acquiring bank. The acquirer and issuer mediate in the dispute process, following rules set forth by the corresponding bank or card association. If the acquirer prevails in the dispute, the funds are returned to the acquirer, and then to the merchant. Only 21% of chargebacks lodged globally are decided in favor of the merchant.

Merchant Penalties:

The merchant’s acquiring bank accepts the risk that the merchant will remain solvent over time, and thus has an incentive to take a keen interest in the merchant’s products/services and business practices. Reducing consumer chargebacks is crucial to this endeavor. To encourage compliance, acquirers may charge merchants a penalty for each chargeback received. Payment service providers, such as Paypal, have a similar policy. PayPal Merchant charges $20.00 for each chargeback (regardless of whether or not

it is the first) plus it will retain the original transaction fee. Where most banks and merchant providers charge a fee of $25.00.

In addition, Visa and MasterCard may levy severe fines against acquiring banks that retain merchants with high chargeback frequency. Acquirers typically pass such fines directly to the merchant. Merchant whose ratios stray too far out of compliance may trigger card association fines of $100.00 or more per chargeback.

Other Types of Chargebacks:

Accounts may also incur credit reversals in other forms. ATM reversals occur when an ATM deposit envelope is found to have less funds than represented by the depositor. A chargeback is made to correct the error. This could result due to a counting error or intentional fraud by they account holder, or the envelope or its contents could have been lost or stolen.

Chargeback also occur when a bank error credits an account with more funds then intended. The bank makes a chargeback to correct the error. If an overdraft results and it cannot be covered in time, the bank could sue or press criminal charges. When a direct deposit is made to the wrong account holder or in a greater amount than intended and a chargeback is made to correct the error. Finally, chargebacks occur when an account holder deposits a check or money order and the deposited item is returned due to non-sufficient funds, a closed account, or being discovered to be counterfeit, stolen, altered, or Banks may sue account holders or press criminal charges when chargebacks are required due to fraudulent activity and insufficient funds are in the account to cover the chargebacks.

Criticisms:

Consumer may abuse the chargeback mechanism at the expense of merchants. For example, consumer who experience buyer’s remorse, or engage in other forms of friendly fraud, may habitually reverse transactions. Credit card issuers often are unable or unwilling to properly process chargeback responses (to the card holder’s chargeback) by merchants with the result that the card issuers in many cases accept reversal of the merchant chargeback even though the card holders chargeback claim is valid. Card issuers often don’t follow the card associations procedural rules (published online) applicable to the parts of the chargeback process after the initial chargeback. This is in some cases a violation of Treasury Regulations Z (credit cards) and E (debit cards) and these card holder may in those cases be able to reacquire the chargeback funds from the card issuer despite its inability to collect the funds from the merchants account due to the card issuers failure to fully comply with the chargeback rules. If a card holder finds that the card issuer fails to comply with chargeback rules, they can file a complaint with the relevant state and federal regulators (e.g., the FDIC, the Controller of the Currency, The Federal Reserve), after first determining which regulator supervises the card issuer’s operations.

Card issuers who file a chargeback with an identity-theft related reason code have no obligation (and in fact have financial disincentive ) to report the consumer’s account as compromised. As a result, consumers have an incentive to report any unwanted item on their bank or credit card statement as fraudulent.

Wikipedia contributors. “Chargeback.” Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 5 Feb. 2015. Web. 27 Feb. 2015.

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