Best Practices for Merchants Managing COVID-19-Related Cardholder Disputes

Lightning never strikes twice, as the saying goes. But as many merchants are finding out these days, misfortune, in fact, strikes in threes. Not only has COVID-19 caused a substantial slowdown in the U.S. economy and reduction in retail sales, merchants have also seen a significant increase in customer-initiated chargebacks for pre-purchased or pre-booked merchandise and services, or requests for refunds.

In some cases, customers have initiated a chargeback and requested a refund, resulting in a double-recovery at the merchant’s expense. So what can merchants do to protect themselves against unwarranted chargebacks and losses?

1. Check Whether the Chargeback Is Valid 

According to Visa, just because the merchant canceled the good or service, or the good or service will not be provided to the cardholder, that does not necessarily mean the cardholder (through the card issuer) can dispute the transaction under the Visa rules. Still, other dispute resolution paths may be available to the cardholder.

However, bear in mind that credit and debit cardholder error resolution rights under TILA/Regulation Z and EFTA/Regulation E, respectively, may be more protective of consumer rights than the Visa rules or guidance. To the extent there is any conflict between Regulation Z and the card network rules with respect to the rights of a credit cardholder, Regulation Z will control, and the same applies to Regulation E and the card network rules with respect to a debit cardholder.

2. Check Whether a Refund Has Been Issued When Handling a Chargeback, and Vice Versa

While issuers are supposed to check whether a refund has already been issued before crediting a cardholder’s account for a chargeback, given that there is no risk of loss to the issuer either way:

• The onus is effectively on merchants to verify that no chargeback has been initiated with respect to a transaction for which the merchant is prepared to issue a refund; or
• That no refund is made as to a transaction that has already been charged back.

3. Steer Customers Toward a Refund Rather Than a Chargeback 

Although Visa and Mastercard have both indicated that they are willing to work with merchants to find a solution addressing the spike in cardholder disputes, and are monitoring issuers for excessive invalid chargebacks, merchants nonetheless bear the majority of chargeback risk.

Apart from its direct losses from chargebacks and associated fees, a merchant experiencing an unusually high chargeback rate runs the risk of being placed in a dispute monitoring program, having to pay additional fees, assessments and interchange, and being terminated and placed on the MATCH list if the chargeback rate remains too high. Thus, although it may not be possible to issue a refund to every customer who has a valid claim, merchants may wish to steer them down this route in lieu of a chargeback.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.