Who Pays For Fraudulent Credit Card Transactions?
Credit card fraud is an issue that affects a number of different parties. Credit cardholders, banks, merchants and the scammer are all involved in a process that can take weeks or even months to fully resolve.
The best way to deal with credit card fraud is to avoid it if at all possible. Don’t give out critical information like credit card numbers and social security numbers over the phone, or to anyone that solicits you. The only time you’ll want to give that critical information is if you are dealing with a reputable organization, such as your bank. And even then, you’ll only want to give up that information if you started the conservation—such as you would if you applied for a loan or a new credit card. Identity thieves have been known to pose as credit card companies and student loan processors, sending out unsolicited emails in hopes that you respond with credit card numbers, social security numbers and other personal information that they can use to commit fraud.
When fraud has occurred, there are a variety of protections in place to keep you from shouldering the entire burden. Credit cardholders tend to be more protected than debit cardholders, and often the banks and merchants will end up going back and forth over who should get reimbursed for the fraud.
Credit Cardholders Liability Limited
If you own a credit card, you can rest easy. Congress enacted the Fair Credit Billing Act, or FCBA, so that you won’t have to worry about shouldering the large burden of a fraudulent charge. Under the FCBA, if your credit card is stolen or has an unauthorized use, the most that you can be liable for is $50. If you report the theft of your credit card before any loss occurs, however, your liability drops down to $0. If your credit card number is stolen, but not your card, you will not be liable for any authorized use. Since online credit card fraud is growing, it is likely you will be a victim of a stolen card number than the theft of your physical credit card. Either way, you have federal protections that limit your losses.
For Debit Cardholders, Liability Can Be Much Different
Although credit cardholders have very little liability in the event of a theft, the story can be much different for those that own debit cards. If you own a debit card, and you report it stolen before the thief can use it, you will not be liable for any charges. That’s similar to what you can expect from credit card ownership in terms of liability protection. However, if someone uses your debit card before you report it stolen, the story changes. Depending on how fast you report your stolen debit card, you could owe various amounts of money. If you report within two business days of learning about the theft, you are liable only for $50. If you report after two business days, but less than 60 calendar days, you could owe as much as $500. If you report after 60 calendar days, you could be liable for the entire amount stolen. If you have a debit card, it is important to be vigilant about checking your accounts and credit history for fraud.
Because credit cardholders have very limited liability under federal law, it is banks and merchants that must shoulder most of the burden. The first institution to lose money is the bank, since the cash to make the purchases comes from banks, and they must reimburse the individual cardholders who were the victims of fraud. Under most circumstances, the individuals or groups that committed the fraud are not going to pay, unless convicted in a court of law. Legal cases could take months or years to complete. In the short term, the banks are out real money, and they will very likely turn to the merchant to be made whole. That’s because most banks will point to poor security or technological issues that allowed the merchant to be compromised. Still, in many cases, banks have to issue new credit cards, which can be a significant expense when made in large numbers.
Merchants carry a significant burden when it comes to credit card fraud. If the merchant delivers products on fraudulent orders, they are out of the product with a difficult road to getting it back. Banks often look to the merchant for reimbursements, since the bank is immediately out of the cash and can sometimes point to security issues with the merchant that allowed the fraud to take place. If there is a certain amount of fraud that occurs at a given store, payment processors could move to terminate the merchant’s account, and that store could be placed on a blacklist, meaning it may be very difficult to find another payment processing firm. While large businesses and corporations can sometimes withstand some losses, it can be devastating for small business owners.
When it comes to credit card fraud, there are significant consumer protections in place. While consumers can usually rest easy (provided the fraud was not perpetuated with a debit card), merchants and banks don’t have those same protections. That usually means both parties will have to determine who pays, and how much. Either way, banks and merchants can be left with significant losses that can have adverse effects, especially for small merchants and regional banks.