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Download PDF Version Consumer Redress, Chargebacks and Merchant Responses in Distant Transac9ons July 2017 Consumers Council of Canada Table of Contents - 2 Table of Contents Copyright 3 Foreword 4 Acknowledgements 5 I - Executive Summary 6 II - Introduction 9 III - Methodological Summary 11 IV - Background 14 V - The Rules 20 VI - What the Consumer Sees 40 VII - What the Merchant Sees 50 VIII - Other Considerations 57 IX - Consumer Survey 60 X - Conclusions 81 XI - Recommendations 90 XII - References 93 XIII - Glossary 99 XIV - Appendices 101 XV - Notes 167 Consumer Redress, Chargebacks and Merchant Responses in Distant Transac=ons Consumers Council of Canada Copyright - 3 Copyright This study evaluates consumer redress, chargebacks and merchant responses in distant transactions in Canada. It includes the results of a survey of 2,000 consumers about their experiences in distant transactions, their knowledge and understanding of protections provided by certain payment methods, including chargebacks. The study also evaluates the information presented to consumers by credit card networks and issuers, and federal and provincial government consumer protection ofVices. It examines merchant perspectives and responses, and the difViculties in managing “friendly fraud” in certain distant transactions. Keywords: chargebacks, distant transactions, provincial consumer protection. © 2017, Consumers Council of Canada Denise Barrett Consulting, Consumer Redress, Chargebacks and Merchant Responses in Distant Transactions Consumer Redress, Chargebacks and Merchant Responses in Distant Transac=ons Consumers Council of Canada Foreword - 4 Foreword The spark for this project was provided by a November 2015 address by Michael Jenkin at a Consumers Council of Canada conference “In Touch with e-Consumer Protection.” Jenkin is the former Director General of the OfVice of Consumer Affairs and chaired the OECD Committee on Consumer Policy throughout the development of the OECD’s Consumer Policy Toolkit. In his address, Jenkin noted consumer protection in e-commerce relied on inconsistent rules based on payment choice. “Right now, it’s a mess. You use a debit card, you use a credit card, never mind the new platforms, what in fact you are covered for or not, as a consumer … all hinges on the platform or the technology used,” he said. “We have to consider technology neutral rules about what it is you are covered for and what it is you are liable for as a consumer when you are using these payment mechanisms.”¹ He said there were core rules – “if you don’t get what you ordered, if it’s not what you ordered, if what you ordered doesn’t work” – where basic protections could be implemented more rigorously “regardless of what your payment mechanism is.” In a followup interview, Jenkin said the payment industry does not want this basic “chargeback” protection – which has become an almost automatic methodology – adopted in legislation. “I Vind their arguments a bit odd. This is something to incent consumers to use a payment method, but they don’t broadcast it much in plans.”² Jenkin said debit redress rules were more constrained, and with more alternative payment choices: “It’s impossible for a consumer to understand all the rules and options.” The differences in protection by payment method and merchant responses to disputes in distant transactions form the focus of this report. The three scenarios Jenkin described – something I ordered never arrived, it arrived but doesn’t work, and I ordered a red one but got a blue one – are used throughout this report as an informal litmus test of protection. Consumer Redress, Chargebacks and Merchant Responses in Distant Transac=ons Consumers Council of Canada Acknowledgements - 5 Acknowledgements The Consumers Council of Canada greatly appreciates all participants who responded to requests for consultations to assist with this research. This includes provincial government representatives, industry executives who provided insight and other research, representatives from other interested parties, and the Environics research team. Research methodologist Dr. Derek Ireland provided valuable assistance. Consumers Council of Canada has received funding from Innovation, Science and Economic Development Canada’s Contributions Program for Non-proHit Consumer and Voluntary Organizations. The views expressed in this report are not necessarily those of Innovation, Science and Economic Development Canada or of the Government of Canada. Consumer Redress, Chargebacks and Merchant Responses in Distant Transac=ons Consumers Council of Canada Execu=ve Summary - 6 I Execu9ve Summary It is as if carmakers were required to include seatbelts, but did not explain their purpose or provide any instructions to car passengers. Background Canadians are less reliant on stores and becoming more reliant on electronic commerce. “Shopping” now involves a few clicks or taps on a computer, smartphone or other devices to purchase goods and services. There are more choices of merchants, and more choices of how to pay for purchases. There are also more challenges for consumer protection. When you purchase something online, you expect it to arrive on time and matching the description. When it doesn’t, and the seller is uncooperative or unresponsive, a buyer’s protection rights can depend on a number of factors: how they paid, their province of residence and its consumer protection rules, the policies of payment card issuers, networks and online marketplaces, payment industry codes of conduct, and the merchant’s rules disclosure. When the buyer is in Lethbridge and the seller in Luxembourg, resolution of disputes can be complex. One consumer protection is the chargeback, a commitment by some payment networks to allow consumers to recover costs in certain circumstances. Methodology This research focused on the experiences and attitudes of Canadian consumers who have had disputes over distant transactions. This included their experiences with and understanding of chargebacks and other forms of recourse, as well as merchant responses to their actions taken. To gather this information, 2,000 Canadians participated in an online survey conducted in March 2017 by Environics Research on behalf of Consumers Council of Canada. The preparation of the survey questions required research into published academic papers and statistics as well as an online review of the consumer-facing information. The literature review included historical and international developments. Relevant provincial consumer protection laws were reviewed. Interviews with federal and provincial Consumer Redress, Chargebacks and Merchant Responses in Distant Transac=ons Consumers Council of Canada Execu=ve Summary - 7 government protection ofVicials and representatives of credit and debit card networks, banks, chargeback management Virms and other industry participants provided additional perspectives. The Vinal report reVlects input from all those sources. Summary Conclusions Consumers are not well informed about the protections available to them in payment card transactions. A signiVicant portion of them – about one quarter – profess no knowledge of credit card chargeback protections, while fewer than one-third are strongly aware of chargebacks. In the aggregate, consumers show little understanding of the type of disputes that chargebacks are designed to address. The consumers’ lack of understanding reVlects the disclosure choices of card issuers. With few exceptions, card issuers do not disclose this protection to consumers in agreements or promotional materials. No law compels this. Newer entrants such as PayPal and Amazon provide more information about consumer protections and how disputes are resolved. It requires a bewildering conVluence of events for the Vinancial services industry to design a sophisticated mechanism to protect consumers in distant transactions, and then choose systematically not to inform consumers of this protection. It is as if carmakers were required to install seatbelts, but did not explain their purpose or provide instructions to car passengers. Meanwhile, nearly half (45 percent) of consumers have experienced a dispute in a distant transaction in the past 24 months. The majority are resolved satisfactorily with the merchant alone, but 29 percent of consumers have sought a reimbursement from a payment intermediary in the past two years. About 14 percent of consumers reported that a dispute they had thought to be resolved was not resolved because of subsequent action from the merchant or a third-party debt collection service. Recommenda9ons The report concludes by making a number of recommendations to improve consumer protection in distant transactions. Not surprisingly, issuer disclosure is a key recommendation. Consumers are better protected if they are aware of measures intended to protect them. Industry participants and lawmakers should make this happen. Improvements to provincial consumer protection legislation would reduce the number of discrepancies among provinces and provide more effective protection with emerging payment technologies. It could also reduce the number of discrepancies among payment choices; current laws speciVically target credit card issuers, while making no reference to alternatives. Lawmakers need to consider the input of all parties in any public policy debate regarding updated consumer protection laws for federally regulated Vinancial services companies. It is Consumer Redress, Chargebacks and Merchant Responses in Distant Transac=ons Consumers Council of Canada
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