What to Do About the Costly Problem of Chargeback Fraud

by Norman Bluth, Esq. and Mercedes Ozcan, Esq. September 26, 2013

Editor’s note: Travel agents have long bristled at airline debit memos, especially in cases of clear-cut ticket fraud. We asked two travel industry attorneys to explain the issues – and the rules.

Every year a greater number of travel sales are made over the Internet and by phone, including via call centers. While for agents there are significant and growing opportunities for such non face-to-face sales, there is a downside to sales not conducted in person – especially for air travel.

When a customer disputes a credit card charge, travel agents run a real and significant risk of being held accountable for the chargeback if they fail to strictly follow the credit card acceptance rules of ARC and the various credit card companies. This is true even in cases stemming from obvious fraud on the part of the customer.

Unfortunately, despite continued pressure from travel industry trade groups, the credit card acceptance rules for non face-to-face sales remain grossly outdated.

The rules
The rules specify that a travel agency will be held liable for an entire chargeback if the agency fails to obtain a signed and imprinted Universal Credit Card Charge Form (UCCCF) from the client – even though this cannot feasibly be accomplished when sales are made over the phone or the Internet.

What this means in practice is that when a carrier receives a chargeback from a credit card company, the carrier will in turn issue a debit memo to the travel agency that made the sale. This can result in a travel agency being held accountable for thousands of dollars in chargebacks, even though the agency only received $100 or less in service fees from the customer.

Case in point
Here’s an example. Mr. Smith calls ABC Travel and purchases an airline ticket with his credit card. ABC obtains all of the standard information to verify that Mr. Smith’s credit card is approved and not stolen. Once the purchase is completed, ABC Travel sends an email confirmation to Mr. Smith.

The entire transaction is completed by phone and email, so ABC Travel does not obtain a signed and imprinted credit card charge form (UCCCF) from Mr. Smith.

Then, sometime after Mr. Smith travels, he notifies his credit card company that the sale/purchase was not authorized by him. His credit card company will then issue a chargeback to the carrier, i.e. charge the carrier for the disputed amount. The carrier in turn will issue a debit memo to ABC Travel, making the travel agency liable for the entire amount of the disputed sale.

The agency will not be relieved of liability for the debit memo unless it can provide a signed and imprinted UCCCF in accordance with Section 8.4 of the ARC Industry Agents’ Handbook. (See: “Credit Card Acceptance and Chargeback Information.”)

Even if ABC travel produces email exchanges with Mr. Smith evidencing his authorization, the result will be the same.

Unfortunately, in most cases such as this one the only option available to a travel agency is to bring a lawsuit against the customer, which is usually expensive and time-consuming.

ARC’s advice: know your customer
Until the credit card acceptance rules are materially changed by the various credit card companies, travel agents are at risk when a customer perpetrates a fraud. Given this reality, ARC has stressed that “[t]he best way to be protected against credit card fraud is to ‘know your customer.’”

ARC advises agents to “obtain as much information about the customer as possible and maintain the information for future reference.”

Customer information will be useful in defending against debit memos and, more importantly, if the agency decides to bring a lawsuit against the customer to recover the amount of the chargeback.

Some good news
Fortunately, a few credit card companies have made policy changes designed to provide merchants (in this case travel agencies) with additional tools to defend against these types of chargebacks.

For example, Visa recently made changes in their chargeback rules that allow the merchant to produce additional types of evidence to try and prove that the cardholder participated in the transaction and actually received the service or benefitted from the transaction. Visa labels this policy change “compelling evidence.”

The best protection
Bottom line, to protect against chargeback liability for non face-to-face sales, a travel agency needs to know its customers, obtain as much information as possible from its customers, and respond to debit memos and chargebacks within a few days of receiving notice of such.

We also highly recommend that travel agencies follow all of the “tips for travel agents” that ARC presents in its guidance entitled Credit Card Acceptance & Chargeback Prevention.

Norman Bluth and Mercedes Ozcan are attorneys with the Travel Group of McBreen & Kopko, a multi-state law firm. The Travel Group is a team of lawyers with extensive legal and business experience in the travel industry.