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credit
tokens
Under the provisions of the Banking Code, a customer is liable
for unauthorised withdrawals where they result from the customer’s
gross negligence. An example is where the customer keeps a note
of the PIN (personal identification number) with the card, both
are stolen and the thief cleans out the account. The onus of proving
gross negligence falls on the firm.
What
the Banking Code fails to say, and what some firms appear to overlook,
is that using a card to create or increase an overdraft makes
it a credit token for the purposes of the Consumer Credit Act
1974. This means that the customer’s liability for unauthorised
withdrawals is limited to £50, even if the customer was grossly
negligent.
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case
study
Miss H’s purse was stolen. It contained her card and
an undisguised note of her PIN. The thief drew £750
from the account, taking it from a credit of £250
to an overdraft of £500.
The
firm held Miss H liable for the full £750, because
of her gross negligence in keeping an undisguised
note of the PIN with the card.
We
agreed she had been grossly negligent. That meant
she had to stand the £250 credit drawn from the account.
After that, as it was used to run up an overdraft,
the card became a credit token. So Miss H only had
to stand £50 of the £500 overdraft.
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chargeback
Customers often misunderstand how credit cards work. If they use
a credit card in a shop, they think the firm which issued the
credit card (the card provider) then pays the shop. That is not
how it works. Outlets where credit cards can be used are signed
up by a separate firm (the merchant acquirer).
This
is how it works:
- The
firm which provided the cardholder with the credit card is known
as the card provider. It belongs to a credit card network such
as Mastercard or Visa.
- The
shop or the business is known as the merchant. It has signed
up with a merchant acquirer which belongs to the same credit
card network as the card provider.
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The merchant claims its money from the merchant acquirer. The
merchant acquirer claims 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.
If
the card provider (on behalf of the customer) claims the money
back from the merchant acquirer (on behalf of the merchant), that
is called chargeback. The rules of the credit card networks lay
down when and how this can be done.
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There
is no express contractual obligation imposed on a
card issuer to exercise chargeback rights on behalf
of an account-holder. However, industry acceptance
of the custom of processing all disputed transactions
as chargebacks, where a chargeback right exists, is
so common that the ombudsman has determined that it
is good practice to chargeback.
Therefore,
our view is that if an account-holder disputes a transaction
and chargeback rights exist under the relevant card
scheme operating rules, the card issuer is required
to:
- Process
all disputed transactions as chargebacks, where
chargeback rights exist.
- Take
care in exercising any chargeback right. This would
include using the most appropriate reason code for
the chargeback, so that the account- holder’s reasons
are properly represented, and properly completing
chargeback documentation under the relevant card
scheme.
- Satisfy
itself that the response to the chargeback, given
by the merchant acquirer, is a proper response to
the situation.
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 This
is what the Australian Banking Industry Ombudsman said in
his September 2000 bulletin. It is interesting to note that,
independently, he has come to the same view as us.
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case
study
Mr J ordered goods, to be charged to his card. The
goods did not arrive, and he asked the firm to make
a chargeback. The firm told him he was out of time.
The supplier went out of business, so Mr J pursued
a claim against the firm. Mr J had contacted the firm
outside the firm’s own time limit. But the firm had
not previously told him about the time limit, so we
decided he was not bound by it.
Mr
J had contacted the firm within the relevant card
scheme’s chargeback time limit, but the firm had not
tried to make a chargeback. It argued that there was
no reference to chargeback in the account terms, and
that Mr J had no contractual right to a chargeback.
We
agreed that there was no contractual right. But chargeback
was a matter of public knowledge and it was maladministration
for the firm not to attempt one. We awarded Mr J compensation
to cover the cost of the goods, plus his inconvenience
in having to pursue the complaint to us.
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