Chargeback system reveals its flaws

Credit and debit card issuers promote chargebacks as one of the main ways in which use of a card makes for a more secure transaction. But some recent cases indicate that banks and other issuers need to improve their customers' understanding of how chargebacks work and also need to refine their processes for handling claims.

The financial ombudsman service has issued a note on chargebacks, reviewing some recent cases where the issues involved showed that assessing a chargeback application can be complex and can result in the wrong decision.

At the same time a Sydney businessman is in dispute with the Commonwealth Bank about his right to a chargeback on a $150,000 transaction.

Ian Brookfield paid a deposit of $150,000 for a boat, with a full purchase price of $550,000, in March 2008.

The boat builder, Style Yachts, failed and was put in the hands of receivers late last year.

The Commonwealth Bank lodged a chargeback request on Brookfield's behalf in March with National Australia Bank, the acquiring bank for Style Yachts. The request was knocked back and a second request, put through in June, was also knocked back.

The Commonwealth wrote to Brookfield on July 9 telling him NAB had declined the request because it was "out of time".

Card issuers set a time limit for chargeback applications of between 30 and 75 days.  The limit may apply from the date of the transaction or the agreed delivery date for the goods.

Brookfield's case was made complicated by the fact that he did not have a delivery date from Style Yachts. A further complication was that he received notice from the receivers that the contract would be completed and he could take delivery of the boat.

Brookfield disputes this, saying the deal offered by the receivers was deficient in a number of ways, including no offer of a warranty.

Brookfield is now in dispute with Commonwealth Bank, arguing that its statements about chargebacks are misleading and that it has a responsibility to credit his account for the $150,000.

A couple of cases cited by the Financial Ombudsman Service show how much uncertainty there is about the application of chargeback rules.

In one case the disputant made a $1500 payment using a MasterCard to join a travel club. The person then had a change of mind and used the 14-day cooling off period to ask for a refund.

When the travel club failed to pay the refund (and later "disappeared") the person contacted his bank to have the transaction reversed.

The bank said that because the disputant had participated in the transaction the chargeback could not go ahead as an unauthorised payment. For the transaction to be reversed the bank would need to see a credit voucher from the travel club.

Even when it was clear that the club no longer operated the bank maintained the same position.

The ombudsman's view was that because the disputant had cancelled the contract the bank should have taken into account that the travel club had a legal obligation to issue a credit voucher. In the end the bank coughed up the $1500.

In another case the disputant had allowed a business associate to use his credit card to make a payment to help overcome a cashflow crisis.

The disputant later found that the associate had used the card details to make $54,000 of other payments.

When the disputant contacted the bank to have the unauthorised transactions reversed, the bank declined on the grounds that because the disputant knew the person, the disputed transactions could not be classified as unauthorised.

Its definition of fraudulent related to "unauthorised, unrecognised charges from an unknown merchant that a cardholder had no knowledge of and/or association with prior to and at the time the transactions were processed."

The bank then modified its position and reversed some but not all the transactions.

The ombudsman found that the bank did have the right to charge back all the transactions.

What these three cases suggest is that cardholders cannot be sure what they getting into when they make an application for a chargeback. Card issuers need to do some work to clarify how the system operates.