Credit card chargebacks became a reality under Regulation Z of the Truth in Lending Act (TILA) of 1968. The goal was – and still is – an admirable one: to protect consumers using credit cards against fraudulent merchants. As noble as the goal was, the very system that supports it is woefully inadequate today. In fact, in all likelihood, the chargeback process which was cutting edge in 1968 urgently needs to be updated for the 21st century. Let me explain…
“Hey, what’s this charge?”
When Rochelle receives her monthly credit card statement and sees a $27 charge from Town Square Games in Poughkeepsie, NY, she does what millions of cardholders do when seeing an unfamiliar charge: contact her card issuer to file a chargeback. After all, Rochelle knows she is protected even if she doesn’t know it’s because of Regulation Z of TILA. At dinner, Rochelle recounts the day’s activities including her aggravating card charge from Town Square Games. Craig, Rochelle’s 14 year-old son, protests:
“Mom! That’s for my World of Warcraft game! You gave me your credit card to pay for it. You were busy. I got a great deal. Town Square Games is a marketplace for gamers. Don’t you remember?”
“Ugh. You’re right,” She replies. “I can probably call the credit card company back and stop the process”
“What we have here is a failure to communicate…”
Actually, she can’t. Believe it or not, one of the pitfalls of the chargeback process is that once the consumer initiates the chargeback, an arcane process takes over. Not only does the issuing bank instantly reverses the $27 payment from the merchant’s account, the consumer can no longer talk directly with the merchant. The wall between buyer and merchant goes up inside the chargeback process.
“Hey, what’s this chargeback?”
Now it’s the merchant’s turn to be surprised and frustrated. Scott runs Town Square Games which is a small marketplaces for avid gamers. Although the business has been running for ten years, he doesn’t make a lot of money and watches his expenses like a hawk. He knows full well that the chargeback is costing him $25 (fees for chargebacks range from $15 – $50) and to “represent” the chargeback with evidence proving he is in the right will cost another $35 (fees for merchants representing chargeback cases can run another $25 – $100). So, it really makes NO sense for him to contest the chargeback for financial reasons – only for the principle. As conscientious and principled as Scott is, he also has a family to take care of and the $50 additional dollars is nearly a week’s worth of groceries. So he opts not to contest it.
Of course, the danger for Scott is that his acquiring bank is keeping tabs on the quantity and frequency of chargeback. Too many chargebacks and he could face stiff penalties (including increases in transaction fees, as well as increases in the cost to manage and re-present chargebacks). The ultimate penalty could be that Town Square Games is the loss of his merchant account. A new merchant account will cost him a high fixed amount of cash as well as high transaction fees. As challenging as it is for him to manage his small team out of their austere offices in downtown Poughkeepsie, his biggest pain point is chargebacks.
Two ships passing in the night
Rochelle didn’t contact Scott and Scott didn’t contact Rochelle. They didn’t know each other. The chargeback went through and Scott is out the merchandise and $25 (a total of $52). He took a bath on this transaction. Rochelle had a mental lapse and simply forgot she gave Craig her credit card. She realized too late for Scott to get the money that he rightly earned from the sale and to avoid the penalty in chargeback fees. Rochelle did nothing illegal or explicitly wrong. She did what the chargeback process encouraged her to do.
The path forward…
In 1968 AMC (the now defunct American automobile manufacturer and not the cable network) launched the Javelin in the “muscle car” category to much fanfare. It was a sexy and cutting edge model that Motor Trend described as “the most significant achievement for an all-new car”(1). Those of us used to the modern conveniences of driving a car today are likely to find being behind the wheel of a Javelin to be uncomfortable, inconvenient perhaps even unsafe: No anti-lock brakes, airbags, back-up camera, ergonomic seats, GPS navigation, fog lights and so on. The TILA was created in the same year as the Javelin, before there was an internet used for commercial purposes. It did not anticipate the powerful, mass communication infrastructure we have of today. So the question is, How should the chargeback process be modernized to make it more relevant and useful for both consumers and merchants?
Imagine if, instead of a wall going up once Rochelle contacted the issuing bank to challenge the $27 charge, Rochelle was brought into an online, structured conversation with Scott. In Scott’s business, it’s fairly common for underage kids to use their parents’ credit cards to buy a game, machine or controller. The issue could have been resolved quickly; Scott could have asked Rochelle if she happened to have a teenage kid who might have gotten ahold of her credit card. If Rochelle’s issuing bank were given the opportunity to provide this type of in-chargeback functionality, which Modria provides, the transaction problem would have been resolved easily and quickly and both Scott and Rochelle could get on with their lives.
Even today’s muscle cars offer modern conveniences…