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Credit Card Chargeback Laws: What You Need To Know

Commercial businesses are always vulnerable to break-ins and thefts. However, some sectors, such as retailers, are more susceptible to less obvious forms of theft, such as credit card chargeback fraud

Chargeback, also known as “friendly fraud,” occurs when a cardholder disputes a financial transaction and gets the payment reversed by their bank instead of contacting the merchant for a refund. These reversals usually involve customers abusing the chargeback facility to commit fraud. 

Obviously, not all chargeback claims are fraudulent; however, the percentage of chargeback frauds is growing exponentially every year. 

What is the Truth in Lending Act (TILA)?

The Truth in Lending Act or TILA first appeared in 1968. This federal set of credit card chargeback laws aimed to protect consumers from fraudulent vendors while dealing with creditors and lenders. The Federal Reserve Board aided the implementation via a series of regulations. 

The main aspects of TILA address the information that a bank or borrower must disclose to their customers before extending the credit/loan, such as APR, the total cost, and term of the loan. The lender must provide this information to the borrower in writing before signing the loan application and, in some cases, in the borrower’s billing statements. That said, TILA does not dictate how much interest a bank or lender may charge or whether they should or should not grant the loan. 

This is where credit card chargeback laws come into play as they outlined the chargeback system within the U.S. However, they are generic rules, and the process of each chargeback may vary according to each card scheme. 

For example, Visa overhauled its entire chargeback resolution process in 2018 through VISA Claims Resolution (VCR) system. According to VCR, Visa now has 30 instead of 90 days to respond to a chargeback claim. The only drawback is that you, as a merchant, also get 30 days to respond. That said, it is still beneficial to the merchants as it reduces the number of credit card chargeback claims they have to deal with.

Moreover, the new system has streamlined the chargeback codes and automated the entire process to resolve the claims quickly and in a simpler fashion. 

What is the Fair Credit Billing Act (FCBA)?

The Fair Credit Billing Act (FCBA) appeared in 1974 as an updated version of TILA. The goal was to elaborate and clarify aspects of the original legislation, mainly focusing on the following aspects. 

Practices pertaining to credit cards

From the day of receiving their credit card bill, a customer will have 60 days to file a chargeback dispute with a card issuer. The chargeback amount must be more than $50 to qualify as a dispute. 

Other eligibility criteria include unauthorized transactions, incorrect amount or date, and calculation errors. Moreover, the consumer can also file a dispute if they did not receive a product or service. 

How to provide a means to dispute credit billing

Customers must file a chargeback dispute in writing and mail to the card issuer. You can even download a sample dispute letter from the Federal Trade Commission’s website. The card issuer will then have 30 days to acknowledge a claim and complete their investigation within two billing cycles. 

Moreover, the card issuer has no authority to collect the payment in question, charge interest on it, and report it as default or late payment to the credit bureaus. 

How to disclose maximum interest rates in a variable-rate credit contract

Although banks and lenders have the authority to change their interest rates within a credit contract involving variable-rate. However, they must notify the consumers about the changes in writing and mailing it directly to the consumers. 

Uniform Commercial Code (UCC)

UCC is a comprehensive set of legislation governing every commercial transaction within the United States. However, UCC is not a federal but a unanimously adopted law by all states. The uniformity of the credit card chargeback laws allows consistent guidelines and protection for interstate financial transactions. 

Universal adoption also allows businesses to grow while supporting the American economy to flourish. Hence, some refer to UCC as “the backbone of American commerce.” 

What Merchants Need to Know About Credit Card Chargeback Laws

Chargebacks may include the full transaction amount, partial portion of the transaction, or several partial amounts of chargebacks. However, they must stay compliant with the given parameters which include:

Time Limits

A consumer usually gets between 60 and 120 days to file a chargeback claim. After that, merchants have to respond within 45 days to dispute the claim. However, credit card processing companies define these rules, and they will vary by each card type, such as American Express, Discover, MasterCard, and Visa. 

After a business submits a response, the merchant bank will initiate an investigation based on the evidence provided and make a determination. However, more complicated cases may require longer resolution times. 

Chargeback Fees

Being a merchant or business, not having adequate protection against chargeback frauds can leave you prone to certain financial ramifications. Chargeback frauds can be frustrating as well as threatening to your livelihood.

Not only does a bank refund the money to the customer, but it also imposes heavy regulatory fines to your business. The penalties are for not practicing due diligence while dealing with the customer. 

A chargeback fee ranges from $20 to $100. However, it can cost your business two to three times more than the actual transaction cost due to additional expenses, such as operational and customer acquisition costs. 

  • Transaction fee: transaction processors usually charge 3.5 to 4 percent of the actual transaction value. 

  • Operational cost: it involves various processes such as order picking, packaging, and shipment. Operation costs usually amount to approximately 20 percent of your business revenue. 

  • Acquisition and marketing costs: the sales do not come for free. Being a business owner, you need to need to invest in advertising and marketing to win customers. Most businesses spend up to 40% of their revenue in this area. 

Let the Experts Protect Your Business

If you are a business dealing with frequent financial transactions and looking for a solution that can protect you against potential chargeback frauds, you should seek experts’ advice in fighting back. Intellicheck has great solutions for both in-person and online financial transactions to prevent fraud. 

Intellicheck’s chargeback fraud prevention solutions are easy to use and offer simple integration with your existing POS, saving you both time and effort. Most importantly, Intellicheck’s team will help you reduce the potential risks of missed fraudsters slipping through the cracks and causing further detriment to your business.

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