What You Need to Know About Chargeback Laws

What You Need to Know About Chargeback Laws

Chargeback laws have been around for more than 45 years. These laws govern every phase of the chargeback process, including time limits, reasons, reason codes, fines, fees, and more. As a retailer, it is important to understand chargeback laws.

In the United States, there are two key pieces of federal legislation that set the foundation for the chargeback system.

The Truth in Lending Act (TILA)

The original purpose of TILA was to promote informed use of consumer credit. This act allows consumers to cancel some transactions involving a lien on the person's primary home. Passed in 1968, TILA ensures businesses treat consumers fairly by requiring them to inform consumers about the true cost of credit before lending to them. This means businesses must disclose all credit terms in an easy-to-understand format. TILA makes it so that consumers can confidently compare loans and interest rates.

In 1970, lawmakers expanded the law to prohibit issuers from sending unsolicited credit cards to consumers. Over the years, several other amendments and updates have been enacted, such as those contained in the 2010 Dodd-Frank Act.

The Fair Credit Billing Act (FCBA)

FCBA came about as an update to TILA. This Act ensures the details of the original legislation are easy to understand, including how they apply to:

  • Practices pertaining to credit cards
  • How to provide a means to dispute credit billing
  • How to disclose maximum interest rates in a variable-rate credit contract
  • Uniform Commercial Code (UCC), which outlines all current chargeback practices.

It's important to understand these practices and to know that you can turn to the UCC as a single authority for compliance. Instead of dealing with a patchwork of state and territorial laws that are impossible to navigate, the UCC is a one-stop source for everything you need to know.

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What Merchants Need to Know About Chargebacks

There are a few practices you need to be familiar with as a business owner, especially if your company is classified as a high risk merchant. First, the total chargeback cannot exceed the original transaction amount. The issuer can only file for a chargeback for:

  • The full transaction amount
  • A partial portion of the transaction
  • Several partial-amount chargebacks

When filing a chargeback, the issuer can request shipping and handling fees to be included if the item was not received, as well as any surcharges that applied to the transaction.

Another important practice to know about is a chargeback cannot take place on any cash-back portions of a transaction. Also, if a purchased item arrives after the agreed-upon delivery date, the customer must try to return the merchandise prior to seeking a chargeback (it’s the issuer's responsibility to make sure this takes place before the chargeback is processed).

Many reason codes require the customer to contact the merchant and attempt to resolve the issue before filing a chargeback (again, the issuer is obligated to verify this action). If a customer returns an item, the issuer must wait 15 calendar days from the time the return was made to process a chargeback to ensure merchants have time to respond, except in cases where waiting 15 days will exceed the chargeback filing deadline.

Most cards require the consumer to file a chargeback within a set number of days, which could start either the day the transaction was posted, the day the credit card statement was issued, the date the problem was discovered, or another applicable date.

In almost every case, every step of the chargeback process must be completed before proceeding to arbitration, including pre-arbitration, which is commonly known as a second chargeback. It can happen when a merchant wins the first chargeback, but the cardholder or issuer disputes the transaction a second time using new or updated information.

Always make sure your merchant account provider offers chargeback protection. BankCard specializes in payment processing for high-risk merchant accounts, including fighting against chargebacks and friendly fraud. Contact us today to see how you could recoup more profits.

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