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ombudsman news

issue 12

December 2001

plastic cards

when firms withdraw merchant acquiring facilities - leaving retailers unable to accept card payments

Many customers think - wrongly - that if they use a credit card to pay a retailer, the firm that issued their credit card then pays the retailer. Many customers also assume that the firm that issued their credit card authorised the retailer to accept its credit cards. This is how it actually works:

  • The firm that provides the credit card is known as the card provider. It belongs to a credit card network, such as MasterCard or Visa.
  • The retailer is known as a merchant. It has signed up with a merchant acquirer, which belongs to the same credit card network as the bank.
  • The retailer gets its money from the merchant acquirer. The merchant acquirer gets its money from the card provider.
  • Effectively, each credit card network is an electronic form of clearing system - coupled with a delay before the cardholder has to settle up with the card provider.
  • So the chain is actually:
    merchant (the retailer) > merchant acquirer > credit card network > card provider > customer.
  • The card provider does not control where the cardholder can use the credit card, any more than a bank controls where a customer can use cheques.

Because of credit card fraud, this type of agreement can be a risky one - both for the retailer and for the firm that sets up the facility. The situation raises a number of issues. What is the deal for the retailer- And what happens if things go wrong- By the time the fraudulent transaction appears on the genuine customer's credit card statement, the fraudster will long since have disappeared - along with the goods. Who picks up the tab for those goods - the retailer, or the firm that allowed the retailer to accept credit cards in the first place-

Some unfortunate retailers can be the unwitting targets of fraud. But a few of them are in on the fraud themselves. They are what is known in the trade as "collusive retailers" - retailers who know they are accepting ‘dodgy' cards, and take a cut from each transaction.

Firms are, very properly, worried about all of this. Credit card fraud is running at too high a level. But what of the innocent retailer who is targeted by fraudsters- And what is the role of the National Merchant Alert Service - the organisation to which merchant acquirers report fraud- A couple of recent cases show up some of the problems.

case studies - withdrawal of merchant acquiring facilities

12/12
who was the real fraudster and how should chargebacks be dealt with-

S Ltd sells ladies' fashions, mainly by credit card. On 15 January 2000, the firm that supplied S Ltd with merchant acquiring facilities wrote to it asking for signed transaction slips for 14 transactions made the month before (totalling over £3,000).

The firm said that S Ltd had 15 days in which to let it have the transaction slips, but on 22 January it wrote again - this time to say it was withdrawing merchant acquiring facilities immediately. This was because a number of high value transactions had been confirmed as fraudulent. The firm also took almost £6,000 from S Ltd's account, and held it in a separate "frozen" account to meet expected chargebacks from other card issuers, if other customers found their accounts being wrongly debited.

On 27 January the firm reported S Ltd - and S Ltd's principal director - to the National Merchant Alert Service, saying it had withdrawn merchant acquiring facilities because they had both been "involved in fraudulent or suspect activity". A few months later, the firm used £4,000 of the "frozen" money to meet chargebacks, and then gave S Ltd 30 days notice to transfer all its accounts to another firm.

S Ltd complained - vociferously. It said the firm had acted as "judge, jury and hangman"; the report to the National Merchant Alert Service had been "defamatory"; and the firm had no right to "manipulate" its accounts in the way that it did. Taken together, the firm's actions had severely damaged S Ltd's business.

When we looked into the complaint, it was clear, first of all, that there had been a very significant increase in S Ltd's credit card transactions - so the firm was rightly alerted to the fact that something unusual might be going on. And the firm was entitled, under the terms of the merchant agreement, to terminate the facility without notice and to take the £6,000. But we did not accept that the firm had been right to register S Ltd - and its principal director - with the National Merchant Alert Service in the way that it did. Everyone concerned agreed that S Ltd had been the innocent victims of credit card fraud, but the way the registration had been made implied something very different. That registration had particularly affected S Ltd's director, rather than the company itself. So we told the firm to pay the director £2,000.

We also decided that, although the firm had been entitled to take the £6,000, it had not properly handled the chargeback requests it received. To begin with, we were not satisfied that it followed the strict time limits laid down for dealing with chargebacks. Added to that, it was clear that S Ltd had provided copies of almost all the transaction slips in good time. The firm had never given the £6,000 back to S Ltd, so we told it to do so - and to add another £1,750 for inconvenience, delays and lost interest.

12/13
registering fraud with the National Merchant Alert Service

Mr A is a sole trader, who repairs and modifies car engines. It was Mr A's father who set up the business - called A Engineering. Mr A did not take over from his father until 1994, by which time the business had been accepting credit cards for quite a few years under a merchant acquiring agreement with the firm.

In 1997, the firm sent updated merchant acquiring terms and conditions to all its merchant customers - including Mr A. One of the new conditions allowed the firm to withdraw the merchant acquiring facility without notice if there was fraud or suspicion of fraud. If that happened, the new terms and conditions also allowed the firm to tell others, including other card schemes, about what it had done - to help prevent further fraud.

Later in 1997, it became clear that Mr A had been targeted by fraudsters. The firm identified that £19,000 worth of fraudulent transactions had been processed and another £74,000 of fraud had been attempted. So it terminated Mr A's acquiring facility without notice and reported him to the National Merchant Alert Service.

Mr A was very upset. He reckoned the firm had failed him in a number of ways. First of all, he did not think he should be held to the merchant acquiring agreement. This was because it was his father, not him, who had signed it. And he did not think the firm was entitled to register him with the National Merchant Alert Service. Even if it was entitled to do this, he thought it should just have registered the names of the fraudsters - not his own name.

It took more than three years before Mr A could get another firm to let him accept credit cards and he claimed that, because so much of his business was done by credit card, he had lost a huge amount over those three years - to say nothing of the stress and hassle he had to put up with.

We were satisfied that Mr A was bound by the original merchant acquiring agreement, since his father had signed it "for and on behalf of" the business. In any event, Mr A had operated under the agreement ever since he took over the business and the 1997 terms and conditions did not require a signature.

We were also satisfied that the firm was entitled to withdraw the agreement in the way that it did. But we were concerned about the way in which the firm had registered Mr A/A Engineering with the National Merchant Alert Service. Part of the problem was the limited range of standard reasons it had to choose from when it made the registration. The option the firm chose made it look as if Mr A had been up to no good.

We wanted to award Mr A a fair amount to cover his lost trade but he never really came up with any clear figures. So in the end we told the firm to pay him £2,000 for the inconvenience he experienced because of the way in which it registered him and his business with the National Merchant Alert Service.

using a credit card abroad

More and more customers based in this country use their credit cards while abroad. But what happens if, after they get home, it becomes clear that things have not worked out as expected- And what rights, if any, do they have-

Under section 75 of the Consumer Credit Act, a UK credit card issuer is equally liable, with the supplier of the goods or services, for any misrepresentation or breach of contract by the supplier. But it is arguable whether section 75 applies to overseas transactions.

In 1995 the main credit card issuers adopted a voluntary policy, in order to give the government an opportunity of amending the Consumer Credit Act to clarify whether or not section 75 applied to overseas transactions. Under this voluntary policy, the credit card issuers agreed to accept liability for misrepresentation and breach of contract on overseas transactions, up to the value of the credit card payment.

The government never got around to clarifying the Consumer Credit Act and, strictly speaking, the voluntary policy has now lapsed, but many card issuers still treat it as being in force. That makes it good banking practice.

A review of the Act has recently been announced. We hope it will include a review of the applicability of section 75 to overseas transactions and we have suggested to the Department of Trade and Industry that it should. Here are a couple of cases that illustrate the present position.

case studies - using a credit card abroad

12/14
importing carpets

While in India, Miss P used a credit card to buy a couple of silk carpets costing a little over £2,000. The carpets were to be air-freighted to the UK and, soon after she arrived home, Miss P got a note from Heathrow airport to tell her they had arrived. But the airport would not let her take the carpets away unless she paid it another £600 - to cover freight charges, import duty and VAT.

Miss P protested, to no avail, that when she had done the deal in India, the seller told her that he would pay the freight and that there would be no import duty or VAT to pay. Because she really wanted the carpets, she paid up. But she then asked the firm that issued the card to reimburse her with the £600 - under Section 75 of the Consumer Credit Act 1974.

The firm refused, saying that if Miss P wanted to use Section 75, she'd have to sue it and the carpet retailer jointly - and it pointed her in the direction of the British Embassy if she wanted help. It added that Section 75 probably wouldn't apply anyway, since there wasn't anything wrong with the carpets and the sale was governed by Indian law.

We pointed out to the firm, firstly, that under Section 75 there was no need for Miss P to sue the retailer - and neither did there have to be anything wrong with the goods before she could make a claim: Section 75 covers "any claim in respect of a misrepresentation or breach of contract".

We also reminded the firm of the voluntary policy that the main credit card issuers entered into in 1995 to deal with overseas transactions. Many card issuers treat the policy as still being in force, even though - strictly speaking - it has now lapsed. We told the firm it should still apply the voluntary policy as a matter of good banking policy.

We looked at whether Miss P had a valid claim against the supplier. We decided that the supplier:

  • had paid the freight costs to Heathrow - but not Heathrow's own charges (of about £30);
  • had not told her there would be no VAT to pay - so she had to pay it; but
  • had said that she would not have to pay import duty - which she ended up having to pay.

So we decided the firm should pay Miss P the £260 import duty.

12/15
broken down camper-van

Mr R and his family booked a touring holiday in America. Their transport - and accommodation - was to be a large camper-van. But the holiday was a disaster - mainly because of the van. Not only was it very uncomfortable - much smaller than Mr R and his family had expected, or needed - but it kept on breaking down.

Mr R had paid a "non-refundable" deposit for the van before he left the UK. He made a further payment when he arrived in the USA, before picking up the van. Both payments were made on his credit card. He paid the rest of the hire charges by travellers' cheque. At the end of the holiday, the hire company agreed to refund 1,400 dollars to Mr R, but this refund never appeared on his credit card statement.

Mr R complained to the firm and showed it the refund voucher. It re-credited him with almost £900. However, some while later, it took the money back again because it claimed Mr R had not properly answered some of its further questions. The questions arose because the US bank disputed the chargeback.

Mr R said that he had answered the firm's questions - albeit by phone. We decided that he had not really answered all the questions properly, so the firm was not being unreasonable in re-debiting his credit card account with the £900. Nevertheless, it was clear that the van had been far below standard, so we felt he could make a claim against the firm under the 1995 voluntary policy (mentioned in case 12/14 above).

Mr R had paid some, but not all, of the original hire charges by credit card (750 dollars - about £500). We told the firm that it should give him that money back - plus interest, because by then more than a year had passed.

Walter Merricks, chief ombudsman

For printed copies of this or any of our publications, phone 020 7964 0092 or email publications.

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.