This article was first published on the ABTA website on 20 April 2020.
One of the advantages of paying for travel services by card is that the cardholder is able to reverse a transaction if the travel services are not provided. This is commonly referred to as a “chargeback” and it is marketed by card scheme operators such as Visa and Mastercard as one of the key benefits of paying by card. However, the extent of the cardholder’s rights are often misunderstood. The right to chargeback is not absolute.
Similarly, travel companies are often pleasantly surprised to discover that they are able to make chargebacks for travel services paid using a corporate card. For instance, a travel company may use a virtual pre-paid card to pay an airline for its flights. As we saw with the failure of Monarch Airlines and Thomas Cook Airlines, travel companies can themselves make significant recoveries through making chargebacks.
The outbreak of Covid-19 has led to widespread cancellations of holiday bookings, with customers and travel companies both looking to make chargebacks to recover sums paid for cancelled bookings. This article sets out an overview of the chargeback process, looking at what it is, how it works and what travel companies should be doing now to address incoming and outgoing chargebacks which arise as a result of Covid-19.
What are chargebacks?
When a consumer uses a credit card to pay a business (the “Merchant”), the financial institution which issued the card (the “Card Issuer”) is liable to the consumer under section 75 of the Consumer Credit Act 1974 for any breach of contract or misrepresentation made by the Merchant if the purchase was between £100 and £30,000.
For instance, if a consumer uses a credit card to buy a flight from an airline, and the airline fails to provide the flight (e.g. because it has entered into liquidation), then the Card Issuer is liable for that breach of contract in addition to the airline. The consumer can demand that the Card Issuer provide it with a full refund.
The Card Issuer will obviously want to recover its losses from the Merchant and the way it does this is by asking the relevant card scheme (e.g. Visa or Mastercard) to reverse the transaction. This “chargeback” will be passed on to the financial institution which processes card transactions for the Merchant (the “Acquirer”) and the relevant sum will be debited from the Acquirer and credited to the Card Issuer. The Acquirer will typically pass on this reversal to the Merchant, but if the Merchant is insolvent then that will be impossible and the Acquirer will have to suffer the loss. This is why we see Acquirers demanding security from Merchants when their financial position deteriorates.
Whilst s.75 gives a consumer a statutory right to hold the Card Issuer liable, most Card Issuers will also agree to make chargebacks for debit card purchases. This is usually said to be “voluntary” in the sense that the Card Issuer does not consider it bound to initiate such chargebacks. Rather, the Card Issuer may decide to do so and then pass on any sums which are successfully charged back. Similarly, issuers of corporate cards usually agree in their terms of engagement to initiate chargebacks for their corporate cardholders if such a right exists under the card scheme rules.
When can a chargeback be made?
Visa and Mastercard have both published rules for when chargebacks may be raised by Card Issuers (“Chargeback Rules”). Following the outbreak of Covid-19 and the mass cancellation of travel services, Visa and Mastercard have supplemented the Chargeback Rules with guidance on how they intend to deal with various chargeback scenarios. The guidance is quite fluid and liable to change as time passes and so the comments in this article are accurate only at the time of writing.
The Chargeback Rules are detailed (Mastercard’s rules are 438 pages long) and set out strict conditions which have to be met for a chargeback to be permitted. It is therefore not certain that a chargeback will succeed simply because a cardholder has paid for a service which it has not received. The Card Issuer will have to show that the cardholder’s particular factual circumstances qualify for a chargeback under the Chargeback Rules, provide the required supporting documents and comply with the deadline for initiating a chargeback.
The relevant part of the Chargeback Rules most frequently relied upon in the travel industry is that which allows a Card Issuer to make a chargeback where the Merchant has failed to provide the service purchased by the cardholder. This will cover cancellations caused by Covid-19, subject to the potential challenges we describe below.
Can a chargeback be challenged?
Yes. The Acquirer may contest a chargeback if it does not satisfy the terms of the Chargeback Rules. This will depend on the facts of the particular chargeback but set out below are some examples of such challenges.
There are certain procedural reasons for why a chargeback may fail. A failure to make a chargeback within 120 days of the holiday date is one example. Similarly, Visa insist that the cardholder attempt to resolve the issue with the Merchant before initiating a chargeback. Mastercard requires the Card Issuer to lodge a letter / email / form / message from the cardholder which describes the basis for the chargeback. These are just a few examples of some of the procedural requirements which may invalidate a chargeback if they are not followed.
Another important factor to consider is the terms and conditions agreed between the Merchant and the cardholder. Certain aspects of these are likely to be relevant to a chargeback. For instance, Mastercard will pay attention to any rights the travel company may have to provide reasonable alternatives to the customer, as well as the terms of any force majeure clause which may apply. If these deny the cardholder a cash refund, then that may invalidate the chargeback.
There is also currently a significant unresolved issue as to whether Visa and Mastercard will allow chargebacks to be made against a retail agent, where the failure or cancellation is on the part of the principal (e.g. airline or tour operator). The contractual analysis on this issue is clear: any failure by the principal to provide the travel service is an issue between the principal and the cardholder. The travel agent is not itself liable because it has provided the service it promised to give when it helped the cardholder to choose and book a holiday. At the time of writing, this is an area of uncertainty and there are indications that Mastercard may hold the retail agent liable. That would be a surprising outcome as its practical effect would be to drive a coach and horses through the legal position agreed between the cardholder and the retail agent. The retail agent would end up having to refund the cardholder for the principal’s breach of contract.
Finally, Visa has also recently published helpful guidance which suggests that it will not permit a chargeback if the Merchant was unable to provide the travel service because a law or regulation explicitly prohibited the Merchant from offering the service. This clearly captures holiday accommodation in the UK, which is subject to an explicit order to close save in very limited circumstances. There have been similar laws passed in other countries. Therefore, this rule would appear to give travel Merchants some relief, although Visa will expect the Merchant to have offered reasonable alternatives (e.g. a refund credit note) in order to rely upon this basis for challenging a chargeback.
What is the process for a chargeback, and what does it cost?
The chargeback process for both Visa and Mastercard are almost identical. The process for Mastercard involves the following stages:
- Cardholder raises a chargeback issue with the Card Issuer.
- Card Issuer make a chargeback submission to Mastercard, which is transmitted to the Acquirer.
- The Acquirer (after having consulted the Merchant) must decide whether to accept or reject the chargeback. If the Acquirer decides to reject the chargeback, it must provide the card scheme operator with its reasons for doing so, which will then be transmitted back to the Card Issuer.
- The Card Issuer must decide whether to accept or reject the Acquirer’s challenge. If the Card Issuer decides to contest the reasons given by the Acquirer, it must confirm this to the card scheme operator, which will be transmitted to the Acquirer.
- At this stage, the back-and-forth between the Card Issuer and the Acquirer comes to an end. If the Acquirer wishes to keep contesting the chargeback, it must refer the matter to an arbitration by Mastercard. Visa also offers such arbitration at the end of its chargeback process.
Charges are levied on the Card Issuer or Acquirer for going through the chargeback process. For instance, Mastercard requires the Acquirer to pay €15 to the Card Issuer when a chargeback is first made; the Card Issuer must pay the Acquirer €30 when the chargeback is contested by the Acquirer; and the Acquirer must pay the Card Issuer €45 if its challenge is contested. If the transaction is referred to arbitration, the losing party has to pay arbitration fees of €400. These fees are likely to be passed on to corporate cardholders or Merchants (together with any additional administrative fees charged by the Card Issuer or Acquirer). Therefore, particularly if large volumes of transactions are challenged, it is important for travel companies to factor in this risk to its chargeback strategy.
What should travel companies be doing?
Travel companies will already be receiving chargebacks from customers as a result of Covid-19. Decisions will need to be made as to whether to accept or contest these chargebacks. That decision will need to factor in a number of different considerations, including whether there is a legitimate basis for contesting the chargeback, the time and cost risk involved in doing so and also whether the travel company is itself able to recover that sum from another supplier (possibly by making a chargeback itself).
The process of assessing and contesting chargebacks is likely to be time consuming given the volume of transactions which may be charged back. Arrangements will therefore need to be made to streamline the process, categorising chargebacks into different categories, with standardised responses prepared for each category.
Finally, it is not too late to avoid incoming chargebacks in the first place if some compromise can be reached with the customer. ABTA’s endorsement of refund credit notes may help persuade customers to accept them over a cash refund, particularly if the CAA confirm that they will be ATOL protected. At the time of writing, we are waiting to hear imminently on whether they will do so.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.
Articles and commentary by our legal experts on the impact of Covid-19 are all available here.