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Tlphone : ligne directe (+32-2)295.32.19 , standard 299.11.11. Tlcopieur : 295.07.50.

Tlex : COMEU B 21877. Adresse tlgraphique : COMEUR Bruxelles.
Internet: catherine.gondelmann-bredin@cec.eu.int
THE EUROPEAN COMMISSION
DG Internal market
Financial services
Retail issues and payment systems
12 July 2000
MARKT/173/2000
Payment card chargeback when paying over
Internet
First Sub-group meeting of the PSTDG and PSULG
held on 4 July 2000
WORKING DOCUMENT
2
1. OBJECTIVE OF THE MEETING
The Sub-group payment over the Internet was created as a working group of the
PSTDG and PSULG in order to study the questions raised by payment over the Web.
The first topic proposed by the work programme deals with the refunding of the payment
transactions made via the Internet for which we will use the term chargeback . Its
objective is to draw up a picture of the situation in the European Union with regard to the
possibilities for a consumer to be refunded in the event of a disputed transaction when the
payment was carried out by card over the Internet.
We tried to cover the rules applied by the international payment card schemes to cross-
border transactions and to evaluate how these rules were implemented at the national
level.
A questionnaire was completed by the present representatives of the EU countries. The
questionnaire was answered for the following systems:
Eurocard/MasterCard and Visa Italy
Eurocard/MasterCard and Visa Sweden
Eurocard/MasterCard and Visa United Kingdom
Eurocard/MasterCard and Visa Germany
Eurocard/MasterCard Netherlands
Cartes Bancaires France
This report does not constitute the full minutes of the meeting but a synthesis of the most
important points.
3
2. DEFINITION AND PROCEDURE OF THE CHARGEBACK OF THE INTERNATIONAL CARD
SCHEMES
Definition
Chargeback is the technical term used by international card schemes to name the
refunding process for a transaction carried out by card following the violation of a rule.
This process takes place between 2 members of the card scheme, the issuer of the card
and the acquirer (the merchants bank). The final customers of these 2 scheme
members, the cardholder for the issuer and the merchant for the acquirer, do not have
any direct relationship in the chargeback process.
Procedure
The presentation of Europay International (available on request) outlined the role of each
actor in the chargeback procedure and the principal reasons for invoking chargeback at
the time of a transaction dispute over the Internet:
(1) To initiate the refund procedure, the cardholder must write to the card issuer
informing of the problem he identified when reading the statement of his
transactions.
(2) The issuer analyses the letter and decides according to his own criteria to:
- directly refund the cardholder without using the chargeback procedure. This
generally happens if the amount of the transaction is too low with respect to the
cost of the procedure (C.F. table of the costs of the chargeback in annex p.10
resulting from the answers to the questionnaire), in this case it is a simple refund,
- send a chargeback to the acquirer according to the scheme technical
procedure,
- do nothing because he judges that there is no reason for him to intervene.
(3) If the issuer chooses to send a chargeback, it is transmitted electronically to the
acquirer who, according to the elements provided by the merchant:
- debits the merchant's account if refunding is justified in compliance with the
scheme rules and consistent with the terms and conditions of the merchant
agreement, or
- reintroduces the chargeback in the procedure (= second presentment) with the
reasons justifying why the transaction was well founded on the basis of
documented evidence or other documents in proof that he collected from the
merchant.
Though the term chargeback only refers to an internal process for the card
schemes, it is commonly used to cover the refunding principle.
4
The OECD refers to a banking facility which enables a cardholder who paid for goods or
services (with a payment card) to dispute certain or all aspects of the transaction through the
payment card issuer".
3. STATISTICS ON THE PRINCIPAL REASONS FOR CHARGEBACK FOR THE TRANSACTIONS
OVER THE INTERNET
These statistics were provided by Europay for cross-border transactions of so-called
Pay Later products (for which the debit of the account is deferred), i.e. carrying the
MasterCard brand. It is not possible for the moment to pay with the Maestro debit cards
over the Internet.
N of the reason
code of the
Internet
chargeback
EPI/MCI
Name of the reason for
chargeback
Distribution in
percentage terms
on all the
chargebacks (*) in
1999
RC 37 No cardholder authorisation
(I did not do it)
47.04%
RC 41 Cancelled recurring
transaction
(I did not do it)
8.36%
RC 53 Not as described
(I do not want what I received)
0.15%
RC 55 Not received
(I did not receive what I have
purchased)
0.73%
RC 56 Defective merchandise
(I do not want what I received)
0.07%
RC 59 Services not rendered
(I did not receive what I have
purchased)
4.07%
Other Reason
Codes
Chargebacks not valid for
Internet transactions or
MO/TO
39.58%
(*) Warning : this data concerns all types of transactions, that is to say MO/TO and
Internet transactions but also face to face.
It is estimated that Internet related chargebacks represent 50% of all
chargebacks.
5
One can classify these reasons for chargeback according to our 3 categories of reference:
- I did not do the transaction
- I did not receive what I have purchased
- I do not want what I have received , either because it is defective or does not
conform to its description.
Note the great difficulty of obtaining precise statistics concerning only payment over the
Internet. Indeed most of the time, the indication of the method of order (MO/TO or
Internet) is not provided by merchants in the records transmitted to the acquirer.
The analysis of these statistics as well as those provided through the
questionnaires (C.F. annex p.9) show that the most important reason for
chargeback is I did not do it (RC37 + RC 41).
4. THE CHARGEBACK PROCEDURE AS SEEN BY THE VARIOUS ACTORS IN EUROPE
The cardholder or consumer : he is not informed a priori of the existence of the
chargeback procedure, the issuers do not go as far as making publicity in order to avoid
the potential abuses.
If, when reading his statement, the cardholder notes that a debit was carried out unduly
( I did not do it ), it is natural that he complains to his bank. In certain cases, such as
France where the payment is irrevocable

(rule stipulated in the card contract), the

cardholder will not think of complaining to his bank for a problem related to the sale as
such (I did not receive it, I do not want it ), while international schemes accept this
kind of claim.
The issuer of the card : chargebacks are expensive and their number is growing
significantly because of Internet, especially for the reason I did not do it .
Moreover it is difficult for an issuer to distinguish whether or not the cardholders request
for refunding is legitimate because some of them dispute transactions they have carried out
themselves. These disputes are frequent in the case of on-line consumption of services
where it is more difficult for the merchant to bring the proof of consumption than in the
case of deferred consumption after delivery.
The merchant : in distance selling contracts, the payment is not guaranteed in respect of
fraudulent transactions. It is therefore the merchant who bears a significant share of the
cost of fraud either through the chargeback process or through the banking fees which
tend to compensate for the extra processing costs of handling the high number of
chargebacks. Some merchants have gone bankrupt because of non payment for sales
carried out over the Internet. Distance selling should be considered carefully by merchants
because it is very different from face-to-face and cannot be improvised.

The French legislation made the annulment of payment unlawful except when the card has been lost or stolen.
6
The acquirer - the merchant's bank : problems arise because certain merchants are
badly prepared for global opportunities brought by this new technology which requires
that the acquirer develops new skills in order to advise the merchants. Failing this,
merchants could take their acquirer to court for lack of advise.
Important remark
Opinions converge on the idea that the introduction of effective systems of identification
and authentication of the players of payment over the Internet on a wide scale will have 2
effects. It should:
Eliminate fraud resulting in an I did not do it chargeback, in the cases when the
transaction has not been carried out by the legitimate cardholders but also in the cases
of bad faith cardholders.
Therefore reduce a good many of the chargebacks I did not do it . Bare in mind that
this type of chargeback represents the most important share of the Internet
chargebacks (see above statistics).
On the other hand, the other types of chargebacks are likely to remain because they are
connected with the sale and not with its legitimacy. The chargeback system will become
again then exception (2chargebacks /1000 transactions).
5. DOMESTIC TRANSACTIONS VERSUS CROSS BORDER TRANSACTIONS
One understands by domestic transaction, a transaction made with a card issued in a given
country at a merchant of this same country, for example a Visa card issued by an Italian
bank and accepted by an Italian Visa merchant.
The implementation of chargebacks at the domestic level can diverge from the
implementation at the cross-border level.
Legally, the relative importance of the framework governing chargeback are:
The national rules of a public nature or of general interest such as for example the
Consumer Credit act section 75 in the UK or payment irrevocability in France,
The provisions of the contract concluded between the issuer of the card and its
customer. The cardholder contract takes, in general, account of national rules,
The rules of the international card schemes.
In certain cases, the domestic situation seems more advantageous for the consumer than
the cross-border situation.
7
Thus in the UK for credit cards, at the time of a dispute between the consumer and the
merchant covering the sale of goods or services, the issuer of the card is often bound to
refund the cardholder. The question of whether this provision does not apply to
transactions outside the UK has been brought before the court but has not been settled.
On the other hand in France, the situation is less advantageous. The payment irrevocability
which applies at the national level also stretches in practice to the transactions made
between French cardholders and foreign merchants.
On the other hand, when an American consumer uses his card in France, it is the rules of
the cross border card schemes (Visa or MasterCard) which apply.
This shows that in practice it is the cardholder contract which determines the
cases where the bank accepts the principle of the chargeback.
6. DOMESTIC CARD SYSTEMS ACCEPTED IN PAYMENT ON INTERNET
UK SWITCH scheme debit cards
France Cartes Bancaires scheme payment cards
Germany Geldkarte scheme Electronic Purse
Belgium
*
Bancontact scheme debit cards
Proton scheme Electronic Purse
Foot-note : it is envisaged dedicating a meeting of the working group to the payment by
electronic purse over the Internet.
7. LEGAL COVER AT THE COMMUNITY LEVEL
Since 1995, the OECD has been keen to promote the use of chargeback as a means of
the consumer's recourse and to develop confidence in electronic commerce. This proposal
was approved by most Member States of the OECD.
In 1997, the OECD made a recommendation to its council on this topic, it was not
however accepted, the USA and France having been opposed to it.
In 1999, the Council of the OECD adopted guidelines for electronic commerce. They
recommended the generalisation of the chargeback. To this end, a small Working group
transmitted, at the beginning of 2000, a questionnaire to all the Member States of the
OECD. The Commission forwarded this questionnaire to the European banking
organisations as well as to the international card schemes.

* from what we know
8
The answer which will be given by the end of July by the Commission will rest on the
analysis of the question of the chargeback in the 3 existing Community instruments (C.F.
enclosed tables p. 11, 12 and 13) :
(1) Article 8 of the Directive 97/7 on the distance contracts: this article gives the legal
right to be reimbursed but it does not specify how to refund the cardholder in the
event of fraudulent use. It could be done via a chargeback ( I did not do it ) if
the issuer operates chargeback. It is equivalent, for distance selling, to the measure
entitled zero liability and implemented by Visa and MasterCard in the USA.
This measure exists, additionally, in American legislation.
(2) Article 11 of Directive 87/102 on consumer credit: this measure gives the legal
right to the consumer to take action against the supplier of credit in the case of a
disagreement with the merchant who will not solve amicably ( I did not receive it
and I do not want it). It is what is called connected lender liability . The link
is established between the selling contract and the payment act. Article 11 was
transposed in all the Member States of the European Union for traditional credit.
The question arises today whether to extend this possibility to payments
carried out with a credit card.
Note: in the case of traditional credit, the merchant knows the credit supplier and
may have an agreement with him. In the case of the cards, it can sometimes be
difficult to identify if the card is credit or a form of debit.
Such an obligation exists in the legislation of the USA and the UK for credit cards.
(3) Recommendation 97/489 on electronic payment instruments: it recommends
refunding by the issuer of the payment instrument in the event of error of
processing ( I did not do it ).
8. SITUATION IN THE USA
There are no major differences between the possibilities of chargebacks existing at the US
domestic level and at the cross-border level for American cardholders. The period of
invoking the chargeback is however shorter in the US (120 days instead of 180).
The American market is more oriented towards consumer satisfaction than the European
market. Thus a merchant will refund a customer without hesitation regardless of the nature
of the problem, in order to preserve the commercial relationship.
The differences with Europe occur in the systematic implementation of the chargeback
service by the issuer.
The American chargeback is not therefore simply a process between 2 banks, it is first
and foremost a de facto right for the cardholder. Many of the protections provided
through chargebacks are mandated by the Federal law.
9
Moreover, the regulation of chargebacks in the USA is based directly on legislation
through the following texts

:
Truth and lending act for credit card (Reg Z),
Electronic fund transfer act (Reg E).
Also note the existence of a very effective system of checking of addresses (AVS) which
enables the merchant to protect himself within the framework of distance selling by
checking the postal code of the consumer's address. Such a system is in the process of
development in the UK.
9. IN CONCLUSION
European consumers benefit more or less from the existing chargeback systems of the
international card schemes (Europay/MasterCard, Visa, Amex...).
The effectiveness of this method of recourse can be reduced by the existence of
national rules (e.g. irrevocability in France) which are set as a barrier to the possibilities
offered by the international schemes, both at the domestic and cross-border level or by
the decision of the issuers not to implement them.
The rules used for the issue of a chargeback are the ones of the card issuer country
even for cross border transactions.
The implementation of security measures for the payment over the Internet is a priority
because concerns over security are a major obstacle to its use e.g. the fraudulent use of
the card numbers. It will reduce fraud and at the same time the principal reason for
chargeback (I did not do it), thus installing a more equitable system for the merchants
and reducing the losses of the card issuers (fewer complaints to treat, refunding passed
to the account profit and loss).
Consequently, while the consumer's knowledge of the existence of the chargeback is
inhibited today by the fear of fraud or abuse, it should be possible in the future to be
more transparent.
It would be useful if the card industry were to take measures to obtain the statistics
necessary to measure the payment by card over the Internet.

http://www.cardreport.com/laws/summary.html
10
Finally, chargeback is not a de facto right for the European consumer, in contrast to the
situation in the US. It is the card issuer who is deciding whether or not to launch a
chargeback procedure.
Rue de la Loi 200, B-1049 Bruxelles - Belgique - Bureau: C107 04/22.
Tlphone : ligne directe (+32-2)295.32.19 , standard 299.11.11. Tlcopieur : 295.07.50.
Tlex : COMEU B 21877. Adresse tlgraphique : COMEUR Bruxelles.
Internet: catherine.gondelmann-bredin@cec.eu.int
CHARGEBACK STATISTICS
Country Card Scheme
% of Internet
related chargebacks
Of which are
cross border
transactions
based
distribution by category
Delivery at
home
Immediate
consumptio
n
Q 1.1 Q 1.2 Q 1.3 Q 1.4 Q 1.4
I did not do it I did not receive it I do not want it
Germany Eurocard/MasterCard and Visa 40% to 50% 80% to 90% 80%
not recorded not recorded
N/A N/A
France Cartes Bancaires 83% domestic only = 50% of all CB not possible not possible N/A N/A
chargebacks in 1999
Italy Eurocard/MasterCard and Visa 58% (N) 29.5% (amount) 96.7% (N) 89.2% (amount) 99.9% (N) 99.7% (amount) 0.10% (N) 0.3% (amount) - N/A N/A
Netherlands Eurocard/MasterCard 70% to 80% N/A 98.32% 1.61% 0.07% N/A N/A
= estimate
Sweden Eurocard/MasterCard and Visa 35% to 40% 99% 100% - - 1% 99%
U.K. Eurocard/MasterCard and Visa N/A N/A N/A N/A N/A N/A N/A
12
CHARGEBACK COSTS FOR A CARD ISSUER
Country Card Scheme cross border domestic*
Q 2.1 Q 3.2
Germany Eurocard/MasterCard and Visa 41 euro 41 euro
France Cartes Bancaires (CB EC/MC ou CB Visa) > 76 euro 38 euro
Italy Eurocard/MasterCard and Visa 37.7 euro 37.7 euro
Netherlands Eurocard/MasterCard 20 euro 7-11 euro
Sweden Eurocard/MasterCard and Visa 800 SEK 500 SEK
United Kingdom Eurocard/MasterCard and Visa 11 11
* cost of on us transcation chargeback are less expensive
Rue de la Loi 200, B-1049 Bruxelles - Belgique - Bureau: C107 04/22.
Tlphone : ligne directe (+32-2)295.32.19 , standard 299.11.11. Tlcopieur : 295.07.50.
Tlex : COMEU B 21877. Adresse tlgraphique : COMEUR Bruxelles.
Internet: catherine.gondelmann-bredin@cec.eu.int
Charge-back and e-commerce payments (non-face-to-face transactions)
Consumer
complaint
Sub-category EU Legal text Comments regarding card issuer involvement
Fraudulent non-
authorised
transaction
Article 8, Directive 97/7 (distance
contract)
Main relationships is between cardholder and card issuer (as for Mail
Order Telephone Order MOTO- transaction)
Includes cardholder fraud
Solution: Identification / Authentication
I didnt do it
Processing errors Article 8, Recommendation 97/489
(electronic payment instrument)
Card issuer fully liable
Normal payment
by card
Article 7, directive 97/7 (distance
contract)
Card issuer not involved. Reimbursement by the supplier (Art 7.2), within
30 days.
I didnt get it
With linked credit Article 11 Directive 87/102
(consumer credit)
Card issuer can be involved (Joint liability);
14
Charge-back and e-commerce payments (non-face-to-face transactions)
7 days Article 6, Directive 97/7 : Cooling-
off period 7 days.
Exemptions : art 3 (financial
services) and 6.2
Reimbursement by the supplier (Article 6.2, directive 97.7)within 30
days. Card issuer is not involved
with linked credit: Article 11
Directive 87/102
Card issuer can be involved (Joint liability); Transposition very different
between member States (minimum clause)
I dont want it
> 7 days or
services already
performed
Directive 99/44 on guarantees Card issuer not involved
Rue de la Loi 200, B-1049 Bruxelles - Belgique - Bureau: C107 04/22.
Tlphone : ligne directe (+32-2)295.32.19 , standard 299.11.11. Tlcopieur : 295.07.50.
Tlex : COMEU B 21877. Adresse tlgraphique : COMEUR Bruxelles.
Internet: catherine.gondelmann-bredin@cec.eu.int
387L0102
Council Directive 87/102/EEC of 22 December
1986 for the approximation of the laws,
regulations and administrative provisions of the
Member States concerning consumer credit
Official Journal L 042 , 12/02/1987 p. 0048 -
0053
397X0489
97/489/EC: Commission Recommendation of 30
July 1997 concerning transactions by electronic
payment instruments and in particular the
relationship between issuer and holder (Text with
EEA relevance)
397L0007
Directive 97/7/EC of the European Parliament
and of the Council of 20 May 1997 on the
protection of consumers in respect of distance
contracts - Statement by the Council and the
Parliament re Article 6 (1) - Statement by the
Commission re Article 3 (1), first indent
Rue de la Loi 200, B-1049 Bruxelles - Belgique - Bureau: C107 04/22.
Tlphone : ligne directe (+32-2)295.32.19 , standard 299.11.11. Tlcopieur : 295.07.50.
Tlex : COMEU B 21877. Adresse tlgraphique : COMEUR Bruxelles.
Internet: catherine.gondelmann-bredin@cec.eu.int
SUB-GROUP CHARGEBACK 4th JULY MEETING PARTICIPANTS
Name Organisation Pays e-mail addresse
Organisations carte
Onkelink Isabelle Europay International ion@europay.Commission
Moller Jensens Peter VISA International EU JensenP@visa.Commission
Bridges Helen American Expressservices Europe Limited helen.bridges@aexp.com
European Banking Organisations
Bufton Rosalind European savings banks Groupement rosalind.bufton@savings-banks.com
Alvarez Adriana European savings banks Groupement adriana.alvarez@savings-banks.com
Barbagallo Annalisa European association of co-operative banks a.barbagallo@gebc.org
Wilms Wilfried European Banking Federation w.wilms@FBE.be
National Banking Organisations
Gerdes Daniel ABN AMRO Pays Bas Daniel.Gerdes@nl.abnamro.com
C. Cacho CECA Spanish Confederation of savings banks Espagne ccacho@ceca.es
Carlo Marella Servizi Interbancari SPA Italie carlo_marella@cartasi.it
Ardizzi Guerino Banca d'Italia Italie masi.paola@insedia.interbusiness.it
Masson Christian Banque de France France christian.masson@banque-france.fr
Briat Martine Groupement des cartes bancaires France martine-briat@cartes-bancaires.com
Jacquet Hubert Groupement des cartes bancaires France hubert-jacquet@cartes-bancaires.com
Giraud Sauveur P. Association franaise des banques France pgiraudsauveur@afb.fr
Quinn Sandra APACS UK Sandra.Quinn@apacs.org.uk
Hommel Oliver BVR Allemagne hommel@bvr.de
De Raymaeker Danny KBC belgique anna.vankelst@kbc.be
Commerce
Pereira Ceu Eurocommerce pereira@eurocommerce.be
Consumers association
Domont-Naert Test achats Belgique fdomont@test-achats.be
Patel Ajay Consumers association UK ajay.patel@which.co.uk
Forest Dominique BEUC dominique.forest@beuc.org
Autres
Caulfield Brian Peregrine system brianc@peregrine.ie
EUROPEAN COMMISSION
Nom Nom
MARKT C4 Bader Udo INFSO Moya Alejandro
MARKT C4 Allix Jean INFSO Lefebvre Philippe
MARKT C4 Cyliax Renate
MARKT C4 Gondelmann Bredin Catherine ENTR Roettinger Moritz
MARKT C4 James Stewart
MARKT C4 Spring Reiman Petra SANCO Kerstens Peter
MARKT C4 Tine Sebastiano SANCO Van Huffel Michel
SANCO Garau Carmen
MARKT E4 Ducoulombier Eric SANCO Ring Jens
SJ Troye Anne