Traditional Payment Systems
and Online Dispute Resolution
Mark MacCarthy
Georgetown University
March 2010
The Puzzle
• Why has cross border electronic
commerce stalled?
• Merchants don’t want to ship across
borders
• Consumers don’t want to shop across
borders
2
The Facts
• EU
– Percentage of people engaging in electronic
commerce increased from 27 to 33
– But percentage of people buying goods cross
border is stagnant at 6-7%
– Percentage of merchants selling across
borders decreased from 29 to 21
• Only 4% of Visa US electronic
transactions are cross border
3
Regulatory Problems
• Merchants fear becoming subject to
consumer protection laws in consumer’s
home country
• Consumers don’t know what to do if
something goes wrong with a cross border
transaction
4
A Way Forward
• Payment card dispute resolution systems
can
– Provide consumers with confidence to shop
across borders
– Not subject merchants to varying consumer
protection regimes
• Need legislation in some countries to
enable this
• US OAS proposal
5
Payment System ADR
• Payment networks use a form of ADR as a
means of handling disputes
• Chargeback mechanism resolves transaction
disputes involving their payment cards
– Even if the merchant and the consumer are
geographically dispersed.
• Practical and effective consumer protections for
international electronic commerce transactions.
6
Payment System ADRs for US
Cardholders Are Comprehensive
•
•
•
•
Domestic
International
Online
Offline
7
Unitary Systems
• American Express, Discover
• 3-Parties
– Cardholder
– Merchant
– American Express – acts as an agent for both
cardholder and merchant
8
Transaction Flow in a Closed
System
1. Shop
Merchant
Cardholder
2. Authorization
4. Bill/Pay
3. Settlement
American Express
Discover
9
Distributed Systems
• 4-parties plus Visa or MasterCard
– Card holder
– Merchant
– Cardholder’s bank
– Merchant’s bank
– Network operator
10
Transaction Flow in an Open
System
1. Shop
Merchant
3
Cardholder
Visa
MasterCard
2
Merchant’s
Bank
2
3
2
3
2. Authorization 3. Settlement
4. Bill/Pay
Cardholder’s
Bank
11
Chargebacks
• The return of a transaction from the consumer
card issuer to the merchant's financial institution
• Many reasons for chargebacks
• The merchant’s bank can dispute the
chargeback on behalf of its merchant using the
representment process
• Ultimately, card networks resolve disputes that
are not settled directly between the issuer and
merchant bank.
12
Chargeback & Representment
Shop
Dispute
Merchant
3
Visa
MasterCard
2
Merchant’s
Bank
Cardholder
2
3
Dispute
2
3
2. Chargeback 3. Representment
3
Cardholder’s
Bank
13
Visa Chargeback Codes
• CODE
•
•
•
•
•
•
•
•
•
•
30
41
53
62
70
71
72
73
75
81
CHARGEBACK REASON
Services Not Provided or Merchandise Not Received
Cancelled Recurring Transaction
Not as Described or Defective Merchandise
Counterfeit Transaction
Account Number on Exception File
Declined Authorization
No Authorization Obtained
Expired Card
Cardholder Does Not Recognize Transaction
Fraudulent Transaction
14
MC Chargeback Codes
• 4837
• 4840
• 4853
• 4854
•
•
•
•
4855
4857
4859
4860
No Cardholder Authorization
Fraudulent Processing of Transaction
Cardholder Disputes–
Merchandise/Services
Defective/Not as Described
Cardholder Disputes–Not Elsewhere
Classified (U.S. Region Only)
Non receipt of Merchandise
Card Activated Telephone Transaction
Services Not Rendered
Credit Not Processed
15
Relevant Chargeback Reasons
• Not received
• Defective
• Not as described
16
Targeted to Perceived Problems
• According to the European Consumer
Network (2005)
– The most common complaint (46%) related to
problems with delivery – non delivery, partial
delivery, late delivery.
– The second largest area (25%) related to
defects with the goods or that they were not
what was expected when first ordered.
17
Overall Merchant Responsibility
• Try to resolve the dispute directly with the
customer
• Keep accurate records of all attempts to
satisfy the customer’s dispute including
names, dates, and times.
18
Cardholder Responsibility
• Customer must make a valid attempt
directly with the merchant to resolve the
dispute BEFORE processing the
chargeback.
19
Non-Receipt of Goods or
Services
• If customers do not receive their
merchandise or services, they may pursue
a “Non-Receipt of Merchandise/Services”
Chargeback.
20
Merchant Responsibilities
• Goods or services that were not
immediately delivered at the point-of-sale
must be delivered BEFORE charging the
Customer’s Credit Card.
• Once merchandise has been shipped or
services have been rendered, merchant
must obtain signed proof of delivery of
goods or services.
21
Defective or Not As Described
• If customers feel that service or
merchandise was received in an
unsatisfactory condition (Defective) or if
they feel the service or merchandise they
received was not what they expected (Not
As Described), they can initiate a
chargeback.
22
Merchant Responsibilities
• Keep a detailed invoice detailing exactly
what merchandise was to be received or
what service was to be rendered.
• Include dates, times, locations, item
colors, sizes, etc
• For internet merchants, the merchandise
and final prices should match the
description provided on the website.
23
Merchant Responsibilities
• Make sure all delivered items are packed
properly
• Make sure that the goods are suitable for
the purpose for which they were sold.
• It is the merchant’s responsibility to ensure
that merchandise is delivered to the proper
address and in perfect condition.
24
Restrictions on Merchant
Contracts
• Merchant’s Return/Refund policy cannot
be enforced instead of the chargeback
process
• An invoice or contract signed by the
cardholder waiving their right to process a
chargeback against the transaction is not
permitted and cannot be used to reverse a
chargeback.
25
Basis for Chargebacks
• Chargebacks are contractual rights and
obligations between the financial
institutions in payment networks
• They give no direct rights to consumers
• Their exercise is optional for issuers.
26
US Chargeback Protections
• US chargebacks track US consumer
protection laws
• Protect US cardholders wherever they
shop
– Domestic
– International
– Online
– Offline
27
Truth in Lending Act
• The Truth in Lending Act passed by Congress in 1968.
• Major amendments made by the Fair Credit Billing Act of
1974
• The implementation through Federal Reserve Board's
Regulation Z
• Provides protection against unauthorized use
• Requires creditors to promptly correct billing errors
• Entitles consumers to maintain against issuer the same
claims that they might assert against a merchant in
connection with the purchase of defective or otherwise
unsatisfactory goods and services.
28
Electronic Funds Transfer Act
• EFTA passed by Congress in 1978.
• Implemented through Federal Reserve
Board’s Regulation E
• Provides protections against unauthorized
use and billing errors
• Does not provide redress to a consumer
who has purchased allegedly defective
goods or services using a debit card.
29
Debit Cards in US
• For debit and prepaid cards in US, card
networks provide issuing banks with the same
chargeback rights on consumer disputes as with
credit cards.
• Up to the bank to exercise these rights.
• As a matter of practice, most US issuers do
exercise these rights on behalf of their debit card
customers.
• As a result, debit cardholders are able to bring
merchant disputes to their issuing bank
30
International Limitations
• Payment system chargeback rights are not
the same for all regions
• Cardholders in non-US jurisdictions often
cannot bring a complaint to their issuing
banks about non-delivery or defective
merchandise.
31
OECD Consumer Dispute
Resolution and Redress
• “At present, although consumers in most member
countries are protected (through national laws or selfregulatory schemes) against unauthorised charges due
to loss or theft, protections for non-conforming or nondelivery of goods and services vary greatly among
member countries.
• These protections can be valuable to consumers when
dealing with uncooperative businesses and play a
particularly important role in distance and cross-border
transactions where it may be difficult to communicate
with or take legal action against the business.”
32
International Limitations on
Chargeback Systems
• Would break down if each issuer created its own
chargeback rights corresponding to the consumer
protection laws in their country.
• Merchant bank problems in determining the validity of a
chargeback based on the consumer protection laws of
another country
• Merchants doing business with consumers in other
countries difficulties in determining what their liabilities
might be under a wide variety of foreign laws.
• As the ultimate arbitrator, payment network operators
would have to acquire expertise in laws of 180 countries
• Broad range of possible results would create such
uncertainty of payment that merchants would be
discouraged from accepting payment cards for cross
border transactions.
33
Uniformity Needed
• Uniform statutory consumer protection
rules enforced through mandatory
payment system chargeback
requirements.
• Simple requirements targeted at the major
problems
34
US Proposed Model Law
•
A card issuer must investigate and
resolve a dispute if the cardholder
asserts that the goods or services
involved in a transaction were
– Not accepted
– Not delivered or
– Not provided in accordance with the
agreement made at the time of the
transaction
35
Effect on Competition
• Running a dispute resolution system can
be expensive
• Requiring payment systems to have a
dispute regime would add to the cost of
getting a new payment system up and
running
• Creates still another barrier to entry.
36
Not an Undue Barrier
• Payment system entry requires substantial scale
and financial resources,
• Successful new entry will likely be by large
players.
– Large data processor, a large financial institution and
large merchant
• Such a substantial competitor would have the
resources to provide a dispute resolution system
as part of its new competitive offering.
37
Regulation of Payment System
ADR
• Extensive regulation of the adequacy of
the payment system’s dispute resolution
system would be required.
• Under whose laws would that be
conducted?
38
Fact-Based Standards
• Standards can be built into the law requiring
dispute resolution.
• Questions involved will be either procedural or
factual.
• Relatively easy to ascertain.
• If the law requires action on a complaint within
30 days, then either the action was taken or not
within the time period.
• If it requires refunds in the case of nondeliverance, then either there is evidence of
delivery or not.
39
Merchant Opposition
• Finality of sale
• Law of consumer applies
40
Merchant Advantages
• Increased confidence of consumers
expands demand
• Chargebacks exist today for US customers
shopping abroad
– Merchants receive extra business
• Uniform consumer laws apply common
standards
– Process
– Fact-based
41
Failure in US
• The system hasn’t worked in the US to
increase cross border electronic
commerce
• Suggests that it would not be able to
increase it if introduced into other
jurisdictions.
42
Success in US
• US system built confidence and allowed
widespread use of payment cards
• US cross border electronic commerce
limited by culture, language and
unfamiliarity
43
Coverage
• Works only if all payment systems are
covered
• What about mobile phones and ACH?
• These payment systems do not run
dispute resolution regimes now
• Technical difficulties in developing them
44
Response
• Cover all technically feasible systems
– Mobile phones
– Voluntary self-regulatory code calls for
dispute resolution.
• ACH might not have technical capacity to
withdraw funds
• Customers avoid payment mechanisms
lacking ADR
45
Conclusion
• Uniform rules covering basic consumer
protections run through payment systems
• Should be comprehensive
–
–
–
–
–
Domestic
International
Online
Offline
All feasible payment systems
• One way forward for cross border electronic
commerce
46