Credit Card Companies Are Playing Hard Ball over Chargebacks

Should online gaming site operators be worried about the future of credit card payments? Probably so, says Chuck Crawford of Crown Management Services. In case you haven't heard, MasterCard implemented new chargeback standards effective March 1, 2000.

IGN has obtained a copy of the new standards, which state:

"If a merchant engages in electronic commerce transactions or provides services using Merchant Category Code (MCC) 4816 [Audiotext] or 5967 [Videotext] and has a 1% or higher ratio of chargeback transactions to total sales transactions or a 2.5% or higher ratio of chargeback dollar volume to interchange sales volume in each month for two consecutive calendar months, then MasterCard may, at its sole discretion, declare the merchant an excessive chargeback special electronic commerce/computer network/inbound telemarketing merchant. If, in the opinion of MasterCard, the merchant is issuing credits as a substitute for chargebacks to avoid the applicability of this section, then MasterCard may treat the credits as chargebacks to compute the applicable percentages. In addition, MasterCard may assess the acquirer US$15 for each credit processed."

If the merchant engages is declared an excessive chargeback special electronic commerce/computer network/inbound telemarketing merchant, then for each consecutive calendar month in which the above-described standards are exceeded following the initial two consecutive months in which such standards are exceeded, MasterCard will assess the acquirer a find in the amounts set forth below."

Months 3 through 5,...$25,000 fine per month and an additional $25 per chargeback.
Months 6 and 7, $50,000 fine per month and an additional $50 per chargeback.
Months 8 and 9, $75,000 fine per month and an additional $75 per chargeback.
Months 10 and higher, $100,000 fine per month and an additional $75 per chargeback.

It isn't not known whether Visa has made similar changes in its chargeback policies. Neither credit card giant is known for making its policies, suggested or otherwise, widely known. Such information isn't posted on their websites nor is it sent merchants for crystal clear accuracy.

AVN, a print and online trade magazine geared toward the adult entertainment industry, however, reports that a Visa USA policy will go into effect this summer, with a possible .5 percent threshold.

Until recently, the chargeback limit was 2.75 percent for overall chargebacks. Now that MC has lowered the limit to 1 percent for all chargebacks, many sites will be hard pressed to keep up, Crawford said.

"The largest and most sophisticated operators, and those operators who are growing rapidly (thus favorably skewing the way the CB statistics are calculated) might be able to maintain chargebacks under 1 percent through superb customer service and very efficient refunding to customers."

The top three gaming sites, he added, probably have .5 percent to 1.5 percent chargeback rates due to their excellent customer service and good growth rates. Smaller operators, however, will have a harder time keeping under 1 percent chargeback rates because they aren't able to keep up the growth rates like larger sites. Plus, the issuing banks' policies are more difficult for small companies to fight.

No matter how hard an operator works to prevent chargebacks, however, it will still happen. Some customers, for a variety of reasons, avoid calling gaming sites to refute charges. Instead, the customers let the credit card companies handle the charges. In turn, the banks issue automatic chargebacks rather than send "retrieval letters" to the operator. It's hard to fight chargebacks that the operator doesn't even know about.

Crawford remains sanguine about the effect of MC's new policy on the gaming industry. "The rules could have profound impact on the online gamine industry depending upon how vigorously MC determines to enforce the rules," he said. For one thing, Crawford doesn't believe that these changes are really targeted at the gaming industry. Plus, he has found that credit card policy changes are not implemented immediately, but usually over the course of one to two years.

E-commerce attorney Steve Workman, on the other hand, suggests that the changes are geared more toward the whole phenomena of transactions that aren't made face-to-face--basically the entire e-commerce, telephone, audiotext and videotext industries. "What they're trying to, is get some ground rules in place and see how they work out, industry segment by industry segment," Workman said.

One problem with MC's new policy, says Workman, is that it's an attempt--at least on paper--to fit one solution for all industries, which may or may not be right or effective. "Visa and MasterCard are really perplexed at what to do in the online arena," he added. "Moreover, they're groping at how to distinguish between the different segments of the market, and then, to further distinguish within that context, between the good merchants and the bad merchants. We're really on the front end of all this and we can't expect them to get it all right. We're just going to have to coach them all through it."

Crawford points out that there is some fallout that could drastically effect online gaming sites--"a new policy on refunds, which would off all operators if enforced literally," he explained.

"What MC is saying is that they will calculate the 1 percent by adding chargebacks and refunds together if they determine that the refunds were issued in lieu of a chargeback," Crawford said. "All operators issue substantial refunds in lieu of chargebacks--I would guess at least 3 percent and as high as 5 to 10 percent. … So this is murder. Lastly, the fining provisions will scare off banks who think they want to be acquirers for the merchants in the industry. All in all, this is poison."

MasterCard and Visa are behemoths compared to the billions of dollars online gaming sites rake in annually. There's not much an operator can do to fight against these new rules, although both Crawford and Workman made a few suggestions:

Excellent customer service is the first line of defense. Happy customers are less likely to welch on a bet and more likely to play honestly so they can return for more fun.
Operators need to maintain efficient communications with their banks. This way, if a retrieval letter is sent, operators are able to use the full 10 days time given to solve a chargeback problem.
Screen potential new customers before letting them play on your site. One of the best resources for online gaming sites is the Interactive Gaming Council risk management database using eSuccess' software to protect against fraud.
Take part in the Interactive Gaming Council's Seal of Approval program, and more importantly, join the IGC. The Seal of Approval helps consumers differentiate reputable gaming sites from fly-by-night operators. Additionally, the gaming industry benefits from the IGC's activism on its behalf.

To quote Annie, "There's always tomorrow" and it sure applies here. By no means is this issue concluded. There are legitimate concerns that credit card companies will get out of the online gaming industry - not out of any moralistic concerns. Instead, the online gaming industry has caused credit card companies a number of problems beyond the chargeback issue.

After all, many U.S. states have laws that make gambling debts unenforceable. Thanks to this quirk of legislation, several lawsuits have been brought against credit card companies and their issuing banks for attempting to receive payment from customers who gambled online with their credit cards.

At least operators have some options on how to handle the situation. By following the recommendations from Crawford and Workman, operators can take a step toward protecting themselves and possibly appeasing Visa and MasterCard against further action.

For further information, operators can contact their banks, or check out Workman's site at www.worldweb-law.com.