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ombudsman news

issue 3

March 2001

plastic cards

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.

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.


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.
  • 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.

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.

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.

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.

David Thomas

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.