What merchants need to know about the latest chargeback scheme changes

1. What key changes have been recently happening in the chargeback space?

Due to the impact of the COVID-19 pandemic pushing up chargeback rates, Visa has recently announced some much-needed updates to its chargeback rules. These changes will be effective for disputes processed on or after 16 October 2021, and will effect:

• travel-related disputes
• timeframes for third-party gift cards
• use of compelling evidence for dispute response
• credits or reversals processed prior to dispute
• misrepresentation of investment products or services
• wait time limits for cancelled merchandise or services
• rapid dispute resolution credit issued.

It’s also worth mentioning major changes in the last year to network inquiry programmes offered through Visa and Mastercard. With the acquisition of Verifi, Visa now offers Order Insights to Visa scheme members. This notifies merchants of a pending dispute, allowing them to refund a transaction before it becomes a chargeback. As we found in our recently published 2021 Chargeback Field Report, these inquiries have allowed merchants to reduce chargeback issuances by 17% on average.

2. What role does issuing banks play in chargeback rule changes?

Issuing banks exert influence by reporting issues in fraud and merchant behaviour observed by their cardholders. This can affect how the card schemes design and change rules, particularly for emerging payment methods or new product channels. The card issuers can also exert change through industry committees and trade bodies that lobby for consumer protections and rights.

3. What information can now act as compelling evidence from merchants in ‘merchandise/service not received’ claims?

For category 13 ‘merchandise/service not received’ chargebacks processed right now (prior to Visa’s upcoming changes), issuers are only required to address the information provided by the merchant via their payment processor at the pre-arbitration stage if it meets the allowable use of compelling evidence. 

This rule is being amended to require the issuer to respond to all items of evidence given in the merchant’s response, not just the items defined as compelling evidence. This is a major improvement for merchants who will soon have the opportunity for improved dialogue with the issuer and ensure that all of their arguments are heard.

4. What are the rule changes to gift cards?

Right now, chargebacks where merchandise or services were not rendered due to merchant insolvency or bankruptcy can be processed no later than 120 calendar days from the last date the cardholder expected to receive the merchandise or services – and not exceeding 540 calendar days from the transaction processing date. This dispute time limit leaves merchants that sell third-party gift cards open to potential disputes for an extended time.

However, the latest rule changes mean that if a Visa gift card has no expiry date then the issuer must initiate the dispute no later than 120 calendar days only from the date of purchase of the gift card. This limits the card vendor’s liability, which could be long-lasting where the gift card has no expiry date. This change protects the gift card vendor where the end merchant (where the card could have been used) is bankrupt or insolvent.  

5. Will second chargebacks continue to be viable practice?

Mastercard is making progressive changes to remove the concept of a ‘second chargeback’, meaning that after a merchant has responded or represented, the issuer must proceed to the pre-arbitration stage if the dispute is to be continued. This aligns with the practice that is established in Visa, and will contribute to further efficiency in the ecosystem.

6. Will the reduced time limits always be passed on to merchants?

All merchant timeframes are decided at the top level in the rules, and then specifically dictated by each individual merchant acquirer. For example, one bank may give 10 days to respond while another bank may only give five days. Changes in the card scheme rules in respect of time limits are, in general, passed on and reflected by acquirers for their merchants. We would consider this good practice.

7. What will the new Visa rules for cancellation of subscriptions mean for merchants required to offer refunds?

The rules on subscriptions and recurring transactions have been increasingly strengthened over the last 12 to 18 months. The objective is to ensure that customers are not forced into a chargeback claim as the last resort, and to encourage merchants to adopt best practices in terms and conditions transparency, pre-notification of transactions, and general awareness of how the arrangement will operate. The rules are weighted against any merchant who is not acting in this spirit of transparency, with liabilities and associated consequences following accordingly.

8. What evidence can be used to prove to an issuer that a credit has been offered to the cardholder?

Currently, when cardholders file chargebacks with issuers claiming they cancelled an order for merchandise or a service, they can do so at any time after the transaction has posted to their account. This can cause confusion if a refund or credit is being processed, but has not posted to the cardholder prior to the chargeback being filed. This can result in double refunds to the cardholder and more work for the issuer and merchant.

The evidence requirements are being relaxed, however. Now, a cardholder can prove that a credit has been offered using, for example, an email from the merchant saying that a credit is due. Previously, a voucher, other evidence with the card number, or other evidence that the card would be refunded, had to be provided. That places an additional burden on the cardholder or issuer. For chargebacks filed on or after 16 October 2021, an issuer must wait 15 calendar days from the date the merchandise was returned or services were cancelled. This allows merchants time to issue a credit to a cardholder account if the cardholder contacted them to cancel their order prior to contacting their issuing bank – before initiating a dispute.

9. In what situations might a credit not resolve a dispute?

In general terms, if the credit is in foreign currency then there could be an exchange conversion profit or loss which needs to be resolved. There may be scenarios where a credit is given and the cardholder still has the goods, or has failed or refused to return them.

10. Is there anything else merchants should know about managing current or future rule changes from the schemes?

It’s best practice that merchants have a good dialogue with their acquirers and processors to understand industry rule changes, and ensure they maximise the time to make any adjustments to their business processes to accommodate these – and it will mean they’ll avoid being caught out by an unexpected liability. Using specialist providers like Chargebacks911 also helps. 

About Craig McClure

Craig McClure equips clients with the regulatory knowledge and skills needed to reduce chargebacks. As a Relationship Manager with 10+ years’ experience at issuing banks and card schemes – including Visa, Lloyds Banking Group, and HBOS – McClure aims to eliminate the disconnect between merchants and banks that hinders the fight against payments disputes.

About Fi911

Fi911 supports financial institutions with innovative back-office management technologies created specifically for the banking and payments industries. By offering direct communications between FIs and their ecosystems, the company’s scalable payment product suite offers features that range from fast, flexible merchant onboarding to highly transparent, feature-rich client portals and dispute processing. Established by the dispute experts at Chargebacks911, Fi911 offers global reach and expertise, as well as customised training and support from recognised industry leaders.