Legal
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ChargebackLiability
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by Paul A. Rianda |
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Whether you are a member bank, ISO, or "feet on the street" salesperson, who bears the liability for chargebacks is often one of the most important issues you must determine in a contract. In this article, I will discuss, in general terms, what is a chargeback, who is liable for a chargeback and important contractual issues regarding chargebacks. What is a Chargeback?In most ISO contracts, a chargeback is defined as a transaction that has been returned to a merchant by an issuing bank in accordance with the VISA, MasterCard or other rules. In laymen's terms, what this means is that a consumer contacts the credit card company that issued his or her credit card to dispute a transaction on the credit card bill. The consumer makes a request through the issuing bank to charge the transaction back to the merchant that sold him/ her the goods or services. The credit card issuing bank issues the chargeback that results in the funds for the disputed transaction being taken out of the merchant's bank account if such funds are available. Issues occur when the merchant has insufficient funds to pay for its chargebacks. Who is liable for a Chargeback?Assuming that each party in the chain has accepted liability for chargebacks, the potential for chargeback liability begins with the merchant that initiated the transaction. If a chargeback occurs, then the merchant is the first entity that is liable to pay the chargeback. If the merchant is unable to pay the chargeback, then often times the "feet on the street" salesperson is the next person potentially liable for the chargeback and/or an ISO. If neither the sales agent nor ISO is available to make good on the chargeback, the liability for the chargeback continues up the chain to the member bank that sponsored the ISO. Theoretically, if the member bank were insolvent, the chain of liability would continue up to the credit card association, but this rarely occurs. Contractual Issues
One of the key terms to negotiate in any contract between an ISO and a sales agent is who will be liable for chargebacks. Many credit card processors advertise that they have programs where the sales agent is not liable for any chargebacks. However, there are often exceptions to these "no liability" deals that do allow the credit card processors to chargeback transactions to the sales agent. Chargebacks and Profit Splits
In addition, the issue of chargebacks often determines the percentage of profits that will be paid to the sales agent. As should be expected, the greater risk the sales agent is willing to take in the form of chargebacks, the greater amount of income the agent can expect from the residual stream available from the merchants. Therefore, agents need to balance their tolerance for risk with their desire to make the maximum amount possible from every merchant. |
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