What the Payment Services Dont Want You To Know

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This is a work in progress and will be updated regularly as new information comes in. updated 9/16/2003

Disclaimer: I do not work for a credit card company. I am not an attorney. This info is based on my conversation with people who work for large credit card organizations and banks. If in doubt, consult your own advisors.

What the payment services don't want you to know

Quick review of credit card history

Credit cards are a great deal for their issuers. Merchants pay fees to accept them. Customers pay high interest if they don't pay the bills in full. Credit cards can be a great deal for the merchants. Every salesman knows that the secret to selling is getting the customer to buy it NOW. If he has to run out to the bank or first save up, he can change his mind. But armed with a credit card, the customer buys immediately, the store gets paid quickly and it becomes the customer's problem to get the money later. Credit cards can be a great deal for the customer. He doesn't have to walk around with cash. If there's something he wants now, he can get it now and pay later. So it's a win-win-win situation, right?

The answer would have to be maybe. There are plenty of times where credit cards can be a curse. I am not going to discuss situations where customers charge way beyond their means. I am not a financial advisor and that is not the purpose of this report. I want to concentrate on the area of fraud.

Originally, credit cards were designed to be an in-person payment method. The card was physically present at the time of the transaction and fed into a card reader. Fraud consisted of a thief using a stolen credit card. The victim was seen as the card holder. So the first credit card laws were enacted to protect the card holder. If the card was stolen, the card holder would have only limited responsibility.

The next problem arose when crooked vendors placed fraudulent charges on credit cards. Charge back laws were enacted to allow the card holder to dispute charges that were not recognized. Because credit cards were designed to be an in-person payment method, it became the vendor's problem to produce a charge slip.

The next problem to be considered was when a customer did not receive what was promised. To deal with this, charge back laws were expanded. One of the "gray areas" in charge backs is when the charge is for a service. Imagine hiring a limo and then charging back the cost. The vendor can not show the product. But because it was a service, the rules are a little more lenient toward the vendor in this situation.

Eventually mail order sales became popular and credit cards naturally became the most widely used method of payment for these sales. This introduced new problems. Now charges could be made without the card physically present. Vendors would not have a signed charge slip. Thieves could now use "stolen" credit cards while the card holders still held them. Vendors could charge credit cards without ever providing the goods. So laws were made or expanded to protect the card holder. But lawmakers and the issuing banks are not quick to protect "incidental" folks from problems, in this case, the vendors who accepted these cards. So they left the burden of risk on the vendor. If a vendor accepts a credit card without the physical presence of the card during the sale, the vendor assumes the risk. They did give the vendor some safety measures. If the vendor can prove that the item was shipped to the cardholder's address, it is usually accepted as a good defense and the charge back is denied.

Payment services

Click for review of payment services.

Payment services introduce a new wrinkle. Now the vendor is receiving a payment from a service, not the credit card directly. Now the customer is being billed from a service and not the vendor directly. If the customer is cheated by the vendor, can he charge back the amount billed to his credit card by the service? After all, they provided the service for which the customer's card was charged. It is not their fault that the vendor cheated him.

The answer again is maybe. Read the terms of service (TOS) or Terms of Use (TOU) of your credit card carefully. Some credit cards do not allow you to use third party payment services such as Paypal. If you do so, you give up all rights to dispute the charges.

If your credit card has no problem with your use of a service and if the payment was charged directly to your credit card, you can attempt to charge it back regardless of what the TOS of the service says. Any service that tries to tell you otherwise is lying. Paypal first said you could not make charge backs and later said they were now giving the buyer the right to make charge backs. Paypal did not actually change their operation. They simply changed the wording of their terms to comply with the laws always in effect. Paydirect puts in their TOS that a payment takes two steps. First, your account is funded from your credit card. Next, the payment is sent to the vendor. Therefore, they want you to believe that it can not be charged back. They want you to compare it to a money order, where you use your credit card to buy a money order and then send it to a vendor. If the vendor cheats you, you can not charge back the money order. However, the money order was purchased in person, where the credit card was present. The vendor has a charge slip. In the case of Paydirect, there is no charge slip. Despite their disclaimer, Paydirect knows that charge backs are allowed. That is why further down they say that charge backs will be taken back from the vendor-recipient.

Payment services would like sellers to believe that buyers have unlimited charge back power and there is nothing they can do to stop them. This is simply false. If these services made an effort to defend the seller or even give the seller the opportunity to defend himself or herself, many of these charge backs would be denied. Here is a link to to FTC explaining exactly what rights a buyer has under the law. They are far more limited than some payment services would have you believe. Buyer's Credit Card Rights.

Handling payment service problems

Above all, use common sense and be reasonable. Few things are more annoying than someone who flies off the handle at the slightest problem and expects the worst at all times. If this describes you, stay off the net and avoid auction sites. Mistakes can be made. Before you make a charge back, fire off a nasty email or accuse someone of being a crook, think it over carefully and see if just maybe it might have been an honest mistake. Sellers have been known to send the wrong item by accident. Some sellers do drop-ship, where the merchandise is sent from another warehouse, and mistakes are made. Don't be too quick to react.

Start off with a polite email. If that doesn't get results or yields the wrong results, be more forceful and direct, but not threatening or obscene. Most folks can't think clearly when they are angry. This leads them to threaten or exaggerate the problem and sometimes even contradict themselves in their rush to put their words down. Never react out of anger. If you are not calm and composed, wait until you are or have someone else assist you.

Once you are certain that the other party won't respond properly, contact the payment service. A good payment service should respond because it is easier than dealing with a charge back later.

Personally, if I were running a payment service, I would have a staff of folks just to email and call customers when a problem arose. I believe that most folks are honest. In several hundred transactions, I have never received a bad check and never had a payment through a service charged back. I believe that at least 50% of the folks I do business with are 100% honest. This means that they can be trusted to return something if they accidentally get two instead of one. Most of the rest are 75% honest. This means that they would never bounce a check or charge back something they received. However, should they accidentally get two of something, they would be tempted to keep both. Of the small number that remains, most are 50% honest. This means that they would never steal but if they have a broken item they see nothing wrong in buying another one and then returning the broken one claiming that is how it was received. Most of the rest are 25% honest. They wouldn't steal for fear of getting caught, but if they could charge back something with little risk, they would do so. The remaining under 1% are outright crooks.

So if I were running a payment service and someone reported that they accidentally paid $1013 instead of 10.13, I would contact the recipient and politely inquire if a mistake had been made and can it be corrected immediately before action must be taken. I would guess that at least 95% of people would return the overpayment after such contact.

However, there are some payment services that are just too lazy or understaffed or too busy changing their TOSOTM (TOS of the Moment) to deal with these. For some reason, they find it easier to deal with the charge backs. So if you are (foolishly) using such a service, you may have no other option.

As a buyer:

Don't be in a hurry to charge something back. Credit card companies don't like accounts that charge back too much. You may find that when the card expires, they will not re-issue. And since your credit history is available, other companies may not want your business. You can probably always get a card, but it might be with a company that has poor service and high interest rates. So if you are happy with the card you have, try to keep your record clean. Unless something is a complete rip-off that really angers you, I wouldn't bother to charge back a small item. I'd rather be disappointed in a $10 item than go through all the aggravation of a charge back. I'd call it an educational experience. Another good practice is to carefully check the seller's rating before making your purchase. I have had folks email me about their disappointments (with other vendors) and when I checked the auction, the seller had negative ratings or was brand new. Everyone has to start as a newbie but buyers should not be sending them hundreds of dollars. Don't just check the number, read the actual comments. Some sellers first buy a bunch of small items to raise their number and then begin selling. Some sell many low priced items and once their number is high enough, they start offering higher priced items. A few of these did so with the intent to scam folks on the higher priced items. For detailed information on protecting yourself at auctions, read our guide to auctions.

Next, carefully read the item description. Some of you would be shocked at the number of folks who bid on auctions without even reading the first sentence.

You usually have at least 60 days to dispute a charge, so there is no reason to rush. Sometimes if you email the seller and just threaten a charge back, that is enough to get satisfaction. Again, that is not something I do often because I have found that courtesy works wonders.

If you must charge back, keep your facts clear and to the point. Don't rant and rave. There are a few basic reasons for a standard credit card charge back. "No goods received" is self-explanatory. If the seller can not prove he shipped it to you, you win. "Item not as described" is a gray area. You will have to be factual and clear about what you ordered and what you received. Keep copies of the auction listing and take a photo of what came. Get a witness statement of what was in the box when it was opened. If the item arrived broken, you may have to prove the seller shipped it broken and not that it broke in transit. If it broke in transit, you will be required to report it to the shipper. If it was sent USPS, you will probably have to bring it in for inspection. In almost every case, you are required to ship it back to the seller and retain proof that you have done so. "Unauthorized charge" is where you claim you did not make the charge. If the seller can show proof of shipping to the card holder's address, he might win the dispute.

But as a buyer, you have one more ace in the hole. If your seller doesn't respond or responds but not in the way you want, you still have another option. The merchant in this case is actually the payment service. So first contact them. If they don't help, then do a charge back. Your credit card company will contact the service about the charge back. The service will have to contact the seller.

As a seller:

Because you are processing your transactions through an intermediary, charge backs have a much higher rate of success. Some services will make no effort on your behalf and any charge back hits you automatically. But there is some good news, if you are prepared to close down your account with the service at a moment's notice.

Here is another "secret" the services don't want you to know. It doesn't make a difference whether it is called a charge or whether you use the paypalspeak "reversed payment," a charge to your bank account can be charged back. You have 60 days to do this. So don't ship untill you have withdrawn the payment from your payment service account. Then may then attempt to charge your bank account but you can often prevent that. They will, of course, close your service account or restrict it, so make sure that you can do this at a moment's notice. Again, it probably does not pay to go to this extreme over a small amount but if you are about to lose a hundred dollars or more, it is worth knowing.

What the future holds

Some companies are responding to the challenge of making Internet purchases safe. There are now devices that can attach to a PC which will read the credit card. The cardholder swipes the card and is then brought to the web site of the card issuer where he is asked a few questions to verify his identity. He can then issue a payment to a vendor. The vendor gets only the payment, the order and the shipping address - not any of the CC info. Because the card is physically present, the vendor is guaranteed that a "stolen card" or "unauthorized transaction" will not be filed. The customer still has protection against merchandise not being shipped or the wrong item being shipped.

These devices are safe because once you connect it to your PC, swipe the card and enter your code, the only way a charge can be made is for someone to have your PC, your credit card, your code and call from your phone number. You will also be asked a question at the web site which only you should be able to answer. Chances of a thief being able to accomplish all this is as close to zero as possible.

A company is now offering one such product. They have also started a club where they will pay referrals to members who send them vendors to sign up for the program. My personal recommendation is not to get involved in this program. They are selling their device for $59.95 plus $5 shipping. How many folks will PAY $65 for the "priviledge" of making transactions safer for the vendor? Remember again that folks want to do things right away. Imagine wanting to place an order and being told that you first have to call and order your device and only a week or two later will you be able to buy the item you really want. The company is offering commissions of the sales of a merchant you refer to them. Who will fund this commission? If they expect the merchant to cover it, they will have to charge even more on top of the percentage alreadhy charged by the credit card. To me, this sounds like Paypal all over again. A company with an idea, but no clue how to pay for it.

In any case, I have already gotten offers from credit card companies for FREE card readers if I sign up for a new credit card. With free readers out there, who needs to buy one?

Even Visa itself is responding to the complaints of numerous vendors. They are now beginning a program which will allow even online vendors to verify that the person making the charge is indeed the cardholder. If the merchant belongs to this program, then the cardholder can not claim the charge was unauthorized. Visa Security article Smartcard article.

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