Chargebacks in the time of COVID-19

17 April 2020

One payments-related concern arising from the COVID-19 pandemic is that the scale of chargebacks by cardholders could result in liquidity pressures on, and possible business failures of, merchants. This concern clearly needs to be addressed in a way that balances the needs of both merchants and consumers.

What is a chargeback?

When a consumer makes a purchase from a merchant using their debit or credit card, in some circumstances – including non-receipt of goods or services – their card issuer can dispute a transaction for them with the merchant’s acquiring financial institution. This is called a chargeback. Usually, it can only be initiated after the consumer has tried to get a refund (or an alternative, such as a credit voucher) from the merchant and been unsuccessful.

Why is this seen as an issue now?

The COVID-19 pandemic has led to a multitude of, for example, events, travel and transport being cancelled. This has resulted in consumers not receiving goods or services for which they have paid in advance. The sheer scale of these cancellations and potential chargebacks could conceivably affect the cashflow and therefore the viability of some merchants.

How is the payments industry responding?

Card schemes, card issuers and merchant acquirers have all responded to this potential challenge to ensure that consumers and merchants are not adversely affected in these unique circumstances. They have done so by using standard chargeback processes in a way that does not exacerbate pressure on merchants, but also balances the needs of cardholders.

Card schemes have usefully issued guidance – including best practice examples and FAQs – to issuers and acquirers on how their card scheme rules apply to COVID-19-related chargebacks.

Reflecting that guidance, one key consideration for issuers and acquirers is the terms and conditions that applied at the time the service was purchased by the consumer from the merchant.

For example, where intermediaries are involved (for example the customer has dealt with a travel agent), the terms and conditions may allow the intermediary to delay providing a refund until the intermediary has been refunded by the supplier (for example, a hotel). In such cases:

  • the issuer will delay the chargeback until the intermediary has been given sufficient time to provide a refund in accordance with the terms and conditions; and
  • the acquirer will not process the chargeback until the merchant has been given an opportunity – consistent with scheme chargeback rules – to dispute the chargeback (for example if it has offered a credit voucher or other reasonable alternative per the terms and conditions).

More generally, as they deal with any potential chargeback, issuers and acquirers will of course verify that a cardholder has sought (and not already accepted) a refund, credit voucher or other reasonable alternative from the merchant. In the current environment, this process may take longer than usual.

How are consumers protected?

The obligations on merchants under Australian Consumer Law continue to apply, including that merchants cannot mislead customers – including about what the customer is entitled to under their terms and conditions – act unconscionably when dealing with customers, or rely on unfair terms.

Specifically, the ACCC has clarified that merchants are required to honour the terms and conditions which were in effect at the time the customer paid the merchant for their good or service; these cannot be changed retrospectively. The merchant may however agree to an alternative to a refund with the customer, for example, postponing the services until a later date, or issuing a credit note or voucher, as long as the expiration date is long enough to allow it to be used.