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Apr 15, 2006

The Legal Line

Ed Maldonado

Dear Ed:Our company sells prepaid PINs and calling cards over our website. There are three payment options for our customers on the website: Pay-Pal, VISA and MasterCard. Our website policies control the terms and conditions of our PIN and card sales, and are specifically limited to Virginia law. These policies require all disputes to be communicated to us in writing to review before giving a refund. We have recently experienced a large number of charge-backs from several small businesses purchasing larger quantities of PINs this past January. These charge-backs were processed and taken from our merchant service account without notifying us beforehand. Because it had been over thirty days since we generated and forwarded the PINs to the customer, and the PINS were paid for, we did not expect charge-backs this late in time. Our records show that the PINs have been in use since the day we forwarded them and I tried to tell the credit card company this. However, when I contacted the credit card company, they said that their customer said the charge was not authorized. Whatever that means. It takes forever to get through to the credit card representative that is handling this problem. I was tempted to cut service to the cards but was not sure if the charge-back might be reversed. What laws apply to this problem and can the credit card company simply take the word of the credit cardholder without any proof? Is it better to not accept credit cards and just use Pay-Pal?Prepaid Internet NoviceDear PINIn general, the federal laws that apply to charge-backs or billing disputes of this nature, consumers with credit card or electronic payment, are the Fair Credit Billing Act (FCBA) and Electronic Fund Transfer Act (EFTA). Many E-commerce businesses cite these two statutes directly in their terms and conditions to avoid problems with consumer charge-backs, or at least, limit the procedures that they and the consumer must follow in the event of a bona fide dispute. The Electronic Fund Transfer Act would apply to disputes related to electronic transfer of funds, which include point-of-sale debit transactions, ATM transactions and to some open-loop Stored Value Card services. In your case, I think that the Fair Credit Billing Act is the more appropriate statute of recourse for your charge-back disputes.Under the FCBA, consumers are allowed to go to their credit card company in regard to billing errors or unauthorized charges. The law usually applies to “open end accounts” like credit cards, and requires that if a consumer believes that an error or unauthorized charge has occurred on their billing, they need to contact the company in writing to investigate the particular charge. Timetables are established by the Act to respond to consumers in an expeditious fashion. However, an error and a merchant dispute are two different matters as far as the Act is concerned: disputes about the quality of services are not billing errors and the Act’s dispute procedure does not apply to them. Consumers with claims of unsatisfactory goods, or any kind of dispute with the end merchant, must try to resolve their claims with the merchant first. The FCBA goes as far as to place the credit card company in the merchant’s shoes to avoid needless or baseless claims. Should the merchant have a bona fide defense against the consumer’s claim, so too does the credit card company. Most credit card companies review each charge-back claim on an individual basis for this reason. They will only issue a charge-back if they believe that the claim has merit and the merchant cannot, or fails to, offer a defense. This usually involves the credit card company contacting and interviewing the merchant before undertaking the charge-back.In your case, it seems as though you are in that process of verifying the charge-back and your defenses with the credit card company. Although they are unresponsive to your calls, they seem to be investigating the claim. What is odd about your case is that they have already placed the charge-back against your account. Normally, they should verify your position before authorizing the charge from your account. Also keep in mind that some credit card companies are a little more cautious because if they deny the charge-back and it was a valid error or unauthorized charge, the consumer can go after them and the merchant. This might be the cause of some of the delay.You mentioned that you have usage information on the PINs. This may be important to bring to the attention of the credit card company as it tends to show that someone was conveyed a benefit (or prepaid phone service in this instance). All information related to whom and where you forwarded the PINs will be important. It may show that the account holder of the credit card did receive the services, or that the card may have been stolen from the cardholder and used to buy your PINs. I would not lose faith in securing on-line payments through a credit card company simply because of this. It really seems to be the consumer that may be the prime mover in not paying for services here. Remember that your website adhesion contract (that is your terms and conditions page in conjunction with purchase of your services from the website) may give you recourse under a civil lawsuit against the consumer. You can check with your legal counsel on this just to be sure. Also remember that Pay-Pal would have similar consumer remedies under the Electronic Fund Transfer Act (EFTA), so simply falling back to Pay-Pal may not be the most effective answer to the charge-back dilemma. You may need to simply integrate both the FBCA and EFTA into your website policies and collection practices for E-PIN sales from your site.Send your questions

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