Cardholders have a legal right to file chargebacks in the United States and many other jurisdictions due to a robust legal history of chargebacks. The right to dispute credit card payments is enshrined into American federal law. While the laws didn’t spell out the chargeback process in detail, the legal environment compelled card networks and financial institutions to set up systems for cardholders to file disputes.
The end result was chargebacks, among other things. Let’s take a closer look at the legal history of credit and debit card laws and the emergence of the chargeback process.
The Early History of Credit Cards
Prior to the 1960s, credit cards were rather exotic and most customers didn’t use them. The first credit card was the Diners Club Card and it was issued in 1950. Initially, this card could only be used at select restaurants in New York City, but the concept gained momentum rather quickly.
In 1958, the Bank of America started offering the BankAmericard in California, a more general credit card akin to the cards consumers use today. The BankAmericard would eventually evolve into the Visa network and by 1970 was no longer under the sole direct control of Bank of America. The familiar Visa brand emerged in 1976.
As credit and debit cards grew in popularity, the risk of fraud became a prominent issue. Credit and debit cards, along with other emerging types of credit, were still somewhat exotic and lawmakers worried that everyday Americans could end up defrauded. Initially, cardholders were held responsible for fraud committed with their cards even if the fraud wasn’t their fault. Lawmakers stepped in to provide protection.
Legal Frameworks to Protect Cardholders and Borrowers Emerge
The United States government moved relatively quickly to protect cardholders. In 1968, The Truth in Lending Act was passed to ensure that lenders provided clear information on loans, including the loan term, annual percentage rate (APR), and also the total costs to the borrower.
The Truth in Lending Act provided clarity but cardholders still faced many risks. This was especially worrisome because credit card technologies were advancing rapidly. In the late 1960s, the magnetic stripe was introduced, allowing merchants to simply swipe a card. This greatly increased convenience, but as more parties started using credit and debit cards, risks continued to increase.
The Fair Credit Billing Act of 1974 would pave the way for the modern chargeback process. This act ensured protection for consumers by limiting liability and also ensuring that credit cardholders would have mechanisms to dispute fraud and abuse by merchants. Credit card networks and financial institutions then went on to formulate the chargeback process to ensure cardholders could exercise their rights in an orderly and outlined process.
Interestingly, The Fair Credit Billing Act of 1974 only applied to credit cards and not debit cards. To extend protections to debit cards, the American Congress passed the Electronic Fund Transfer Act in 1978. This act allowed for similar protections for debit card transactions, although the protections are not quite as extensive as they are with credit cards.
The different legal sources of protection are why debit and credit card chargebacks operate slightly differently. For example, when a credit cardholder files a chargeback, they are quickly given a credit. When a debit cardholder files a chargeback, the funds typically aren’t returned until the dispute process plays out.
Merchants Must Manage and Mitigate Chargebacks
Ultimately, both credit and debit card chargebacks are a major risk for merchants. It’s crucial for merchants to proactively fight chargebacks, especially if said chargebacks are potentially fraudulent. Unfortunately, the chargeback process can be abused by unscrupulous cardholders.
The good news? ChargebackHelp offers industry leading tools that merchants can use to combat chargebacks and fraud.