Where Do Chargeback Rights Come From?

Consumers have the right to file chargebacks, but where does that right come from? Where in the law does it guarantee chargeback rights?

In the US, there are two key pieces of legislation that pertain to chargebacks:

• The Truth in Lending Act of 1968
• The Fair Credit Billing Act of 1974

Lawmakers drafted the Truth in Lending Act (TILA) to promote informed use of credit by consumers. This occurred as credit cards were gaining popularity and widespread acceptance. Then in 1970, lawmakers expanded on TILA, prohibiting issuing banks from sending an unsolicited credit card to consumers. TILA has seen periodic updates, expansions, revisions, and reductions over the years. One of the most well-known was the 2010 Dodd-Frank Act.

Six years after TILA’s passage, lawmakers expanded on the law’s scope with the Fair Credit Billing Act (FCBA). This legislation formally laid out and defined several matters that were left somewhat vague in the original legislation. These included fair practices related to credit card issuing and use, and mandating disclosure of maximum interest rates in variable-rate contracts.

Most important to this discussion, though, the FCBA outlined a means through which consumers can dispute charges. This eventually became known as a chargeback.

Parsing the UCC

The FCBA mandated that chargebacks become law. However, the Uniform Commercial Code, or UCC, is the actual body of regulations governing current chargeback practices.

The UCC’s purpose is harmonizing all the countless laws regarding sales and commerce in the US. Rather than trying to navigate an impossibly-complex network of state, local, and federal laws to manage a business, the UCC ensures that there is one universal standard for interstate transactions. So, regardless of the state in which a customer, bank, and merchant are located, the UCC outlines the same chargeback rules for all.

Chargeback practices are outlined under U.C.C. – Article 4 – Bank Deposits and Collections (2002) > Part 2. Collection of Items: Depositary and Collections Banks > § 4-214. Right of Charge-Back or Refund; Liability of Collecting Bank; Return of Item. This section is broken up into six key paragraphs. Here is a simplified explanation of each:

• Paragraph A: An acquirer has the right to withdraw funds from a merchant’s account if the acquirer receives a chargeback due to the merchant’s actions.
• Paragraph B: Explains that an acquirer has formally returned an item (a promise to pay money handled by a bank) when it is sent to the merchant.
• Paragraph C: Gives the issuer the right to transfer any money recovered to their customer, the cardholder.
• Paragraph D: States that even if the line of credit in question has been used before, it is still eligible for a chargeback. Also, chargeback rights are not taken away, even if a bank mishandles the situation.
• Paragraph E: Acquirers’ rights are not invalidated, even if the bank can’t overturn a chargeback and can’t collect from the merchant in question.
• Paragraph F: If a chargeback involves foreign currency, the bank calculates the dispute’s value based on the exchange rate the day the bank is made aware of the foreign currency.

What Does it Mean?

The UCC guarantees the above rights and responsibilities to each party involved. However, implementing these principles and establishing policies around them is largely left to the card schemes to sort out on their own.

You may also notice that the principles outlined in the code are fairly vague and limited. All chargeback policy is, in a sense, the card schemes’ attempt to best interpret and reflect the intent of the rules.

The result of this situation is a considerable amount of inconsistency in industry policy. Consider the Mastercard Chargeback Guide, for example. This book contains only the rules for one card scheme, governing one specific industry practice… and it’s more than 400 pages long. This underscores the need for greater standardization in the payments industry.