It should come as no surprise that the credit card industry is highly regulated. The potential for fraud and abuse involving consumer credit was apparent from early on, and legislation was introduced to protect consumers and preserve their confidence in the system.
Since then, our shopping habits—and our standards for acceptable lending practices—have evolved. New regulations were needed for the credit card industry of the 21st century, and they arrived with the 2009 passage of the Credit Card Accountability Responsibility and Disclosure Act. How did the Credit CARD Act of 2009 change the credit card industry?
Processing credit card payments is a complex, intricate process, and part of the reason for that is the fact that there are a lot of rules and regulations that every party involved in the process is required to follow. In fact, it was federal legislation that created the chargeback process.
To protect their brands and ensure a consistent experience for cardholders, the card networks require the issuing banks and acquiring banks that work with them to follow their rules carefully.
While the card networks update their rules frequently in response to changing market conditions and consumer sentiment, credit card legislation moves at a slow and staggered pace—and rarely in a direction favorable to merchants. The Credit CARD Act of 2009 focuses on granting additional protections to cardholders, although some consumer advocates would argue that it doesn’t go far enough. Nothing about the law improves the chargeback process or offers much else to benefit merchants, but let’s take a closer look at what it does entail.
The global financial crisis of 2008 did a lot to damage the public’s trust in the financial industry, and set the stage for a major regulatory overhaul, most famously in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created an entirely new oversight agency: the Consumer Financial Protection Bureau.
However, this law was aimed squarely at the root causes of the 2008 financial crash. A separate bill, originally framed as a Credit Cardholder’s Bill of Rights, was introduced in 2009 and signed into law less than a year later as the Credit Card Accountability Responsibility and Disclosure Act.
The CARD Act is an amendment to the Truth in Lending Act of 1968, an initial attempt to regulate consumer credit that established various disclosure requirements and borrower rights. The CARD Act expands on those rights and places limits on issuers’ fees, rate increases, and marketing practices.
The Credit CARD Act focuses on the relationship between the cardholder and their issuing bank, and addresses a number of exploitative practices that had arisen since the passage of the Truth in Lending Act.
Interactions between merchants and consumers are not the focus of the Credit CARD Act. The laws around disputes and chargebacks have never been meaningfully updated to address merchant concerns, such as friendly fraud and other abuses of the chargeback process.
Merchants don’t even get to enjoy the benefits of the Credit CARD Act with their own business credit cards—the act’s protections only apply to consumer credit cards.
The Credit CARD Act extends a lot of new protections to consumers, but there are some who say it doesn’t go far enough. The act doesn’t put a cap on maximum interest rates, preserves issuers’ rights to charge “penalty” interest rates on late-paying accounts, and fails to address a number of common predatory lending practices.
Even so, it may have helped reset expectations to a more consumer-friendly baseline—many issuers now go beyond the requirements of the Credit CARD Act in their attempt to win new customers.
Hopefully, a time will come when new credit card legislation gives due consideration to the essential role merchants play in the payments ecosystem. Long-standing issues like friendly fraud and merchant liability for third-party fraud have not been reviewed since the 1970s. Until that day arrives, merchants will have to protect themselves by fighting fraud and chargebacks to the best of their abilities.
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