Consumer Rights For Credit Card Fraud

by Commercial Blawg on May 25, 2012

  • SumoMe

Written by Michael Dolen, the CEO of a major consumer credit website: Credit Card Forum.

For 2010 (the most recent calendar year available) credit card fraud in the UK cost the industry £365.4m. That pales in comparison to the problem in the US, where the cost of credit card fraud was $8.6 billion for the same year (a significantly higher per-capita rate). But regardless of which side of the pond you are on, a consumer’s rights for dealing with fraud are very similar in most developed countries.

Whose jurisdiction is responsible?

It’s no secret that a great number of credit card scammers are located in Eastern Europe and Russia. What happens when they commit fraud using a card from another country, such as the US?

The jurisdiction falls under country in which the card was issued, regardless of where the fraud occurs. For example, if a resident of Los Angeles traveled to London and his U.S. issued Chase Sapphire card was stolen from the hotel, the US laws will still apply in terms of the victim’s rights.

Who is liable for it?

The consumer is generally not liable for covering the loss. In the UK, The Lending Code (previously known as The Banking Code) stipulates that the victim doesn’t have to pay, assuming they didn’t participate in the fraud and treated the account with reasonable care.

Meanwhile in the US, there are several laws on the book for protecting consumer rights in the event of fraud. If only the account number is used (and the consumer still has their physical card) then there’s zero liability. If the physical card is stolen, the consumer may be held liable for up to $50. That being said, just about any respectable bank will waive that $50 “deductible.” For example, my travel rewards credit card was physically stolen and Chase never charged me the $50.

Who ultimately pays for it?

Regardless of who is technically liable, as we all know there’s no such thing as a free lunch in life – ultimately there’s somebody paying, even if it’s not done in a transparent manner.

According to Wikipedia, every 7 cents per 100 dollars worth of transactions is needed to cover the costs. The card issuer absorbs this expense, but where do they get the money to do so? The interchange (processing) fees. Those are the fees which merchants pay for the privilege of accepting card payments – they are typically 1.5% to 3.0% of a purchase’s price. So at the end of the day, the funds are ultimately coming from the merchants.

Since this cost is cooked into the processing fees, merchants aren’t necessarily aware of it. However there is one side effect of fraud which they are definitely aware of… chargebacks. Certain industries experience a higher level of fraud and disputes such as membership websites and mail order businesses. As a result, these merchants pay a higher, risk-adjusted processing fee… which is another way they indirectly pay for fraud.

Who handles disputes for quality?

Obviously not every credit card dispute involves fraud (or if it does, it’s not black and white). Often times, a consumer may buy a product or service and be unsatisfied with it, which results in them filing a dispute with their bank.

When this occurs, the consumer’s legal rights are completely different. Since they authorized the charge, it doesn’t constitute “fraud” and therefore a whole different set of laws will apply. For example in the US, if you’re disputing the “quality of goods and services” this is how it works:

  • The purchase must be for more than $50.
  • You must have made the purchase within your home state or 100 miles of your billing address. That being said, some card issuers count internet purchases, if they were made from your home.
  • You made a “good faith effort” to first try and resolve the problem with the merchant.

If all of the above circumstances hold true, then the FTC’s Fair Credit Billing Act says that you can take the same legal actions against the card issuer that you would be entitled to under state law against the seller. In other words, if the law would allows you to sue the merchant, then you can sue the credit card company, too.

It’s worth pointing out that many higher-end credit cards (both in the US and UK) will go above and beyond the legal requirements in protecting the customer. For example, American Express is notorious for siding with the customer and issuing a chargeback on the transaction, regardless of whether or not the law warranted it. This is one of the reasons why premium cards such as those from Coutts, JP Morgan, and American Express are so popular – they typically offer better protection than the average credit card.

Commercial Blawg

Commercial Blawg

Business law blogger at CommercialBlawg
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