Why Chargebacks are Enshrined into Law

In the United States, federal legislative power rests with Congress. More or less, this means Congress writes federal laws. The President executes those laws, and the Supreme Court reviews them to make sure they are Constitutional. This is important to mention because chargebacks are actually enshrined into law by Congress. As a result, American citizens, no matter what state they live in, can file chargebacks.

In this article, we’ll take a look at why the United States Congress wrote laws that led to chargebacks. Of course, motives may vary from public official to public official, but in general, chargebacks are designed to protect consumers from fraudulent transactions. Also, the term “chargeback” isn’t specifically mentioned in the laws. Ultimately, Congress gave financial institutions a fair bit of flexibility in designing a system that protects consumers. The financial institutions then came up with the system that led to chargebacks.

We’re going to cover some of the major laws and developments. However, chargebacks aren’t impacted by just a single law. Many different laws have an influence on not just chargebacks but electronic payment methods in general. This creates a complex legal web that can’t be fully articulated in a short article. That said, we can and will cover the basics.

Why Did Congress Put Chargebacks into Law?

In the late 1960s and early 70s, various financial institutions started to roll out early electronic payment systems. Credit cards back then were quite novel and most people relied on more traditional payment methods like cash and checks. Credit and debit cards offer consumers a lot of conveniences. However, they also open up consumers to various forms of fraud and other criminal activities. With cash, even if someone steals a consumer’s wallet, the losses are limited to the cash itself.

Suddenly, with credit and debit cards, if a criminal steals a wallet with a card, they might be able to access the consumer’s entire bank account or credit line. Thus, the losses could end up much higher. To mitigate risks for consumers, Congress began to regulate electronic payments and also required that card issuers offer consumers ways to fight fraud perpetrated via electronic payment systems.

Ultimately, Congress was driven by a desire to protect consumers (and thus voters) from fraud stemming from credit and (later) debit cards. From this drive, chargebacks would ultimately be born. Let’s look at some specific laws and how they paved the way for the modern chargeback system.

Specific Laws Passed by Congress Regarding Chargebacks

When it comes to chargeback laws, the Fair Credit Billing Act (FCBA) of 1974 is crucial. This law requires that card issuers, such as a credit cardholder’s bank, provide their clients with a 60-day window to dispute a charge.

The FCBA also requires that card issuers respond to a claim filed by a cardholder within 30 days. Next, the issue needs to be resolved within 90 days. These requirements provide the foundation for the chargeback system in the United States.

That said, the FCBA did not extend to debit cards, ATMs, and similar systems. Just a few years later, in 1978, Congress passed the Electronic Fund Transfer Act (EFTA) that extended some but not all of the FCBA’s requirements to debit cards. How are debit and credit cards different? Let’s take a look.

With credit cards, the FCBA provided protections for people who bought defective goods. If you go to a store, buy a TV with a credit card, but then later find the TV to be defective, the FCBA allows credit cardholders to pursue a chargeback. With the EFTA and debit cards, the law doesn’t require that debit cardholders be provided with an opportunity to file a chargeback over defective products.

A debit card holder can, however, file a chargeback if they believe their card was stolen or otherwise they were targeted by fraud.

Know the Relevant Chargeback Laws

Chargebacks are also enshrined into law in many countries besides the United States. How exactly chargebacks end up legally codified depends greatly on the country. In some jurisdictions, chargebacks are left to regional authorities, such as a provincial government. In other cases, supranational organizations, like the European Union, offer bloc-wide chargeback guidance.

It's smart for entrepreneurs to consider chargeback laws in every country they operate in. This is true even if that country represents only a small part of your customer base. Later on, you may want to expand in these new markets, but if you don’t understand local chargeback laws, you could end up closing that door on yourself.

For example, if you get a high chargeback ratio, say in Canada, you may get hit with higher processing fees (in Canada). This could make it hard to expand in said market later on. By developing a proactive approach to managing chargebacks and using various tools, like chargeback alerts and dispute management platforms, you can mitigate risks.

Chargebacks are a Right but Also a Threat

It’s not hard to understand why Congress enshrined chargebacks into law. Quite simply, policymakers wanted to ensure that consumers using credit and debit had recourse if they were targeted by fraudsters. Unfortunately, however, the modern chargeback system means that the burden of fraud falls onto the backs of businesses big and small.

If a thief steals a credit card and then makes a purchase, from say Acme Big Box Department Store, the merchant isn’t the one who caused the fraud to happen. Instead, the criminal perpetuated the act. Further, it’s quite possible (but not necessary) that the legitimate cardholder enabled the thief by not being careful with their credit or debit card.

Yet regardless, merchants often end up paying for fraud. With chargebacks, not only could the merchant lose the revenue from the sale, but they will also be hit with chargeback fees, see their chargeback ratio rise, and will likely lose any services or products rendered. On top of that, managing and fighting chargeback takes a lot of time (and time is money).

Ultimately, merchants need to proactively fight chargebacks. This will greatly reduce risks by preventing and deflecting chargebacks and also by using dispute management platforms to dispute fraudulent chargebacks. This will require effort. However, protecting your business should take priority.