Can Cardholders File Prepaid Card Chargebacks? You Might be Surprised.
Consumers are loading hundreds of billions of dollars onto prepaid cards each year. That’s great news for online retailers, as it opens previously-unbanked individuals to the eCommerce marketplace…but what happens when a transaction doesn’t go as planned? Can a customer request a prepaid card chargeback?
Prepaid Cards: Defined
First, let’s clear-up what we’re talking about when we mention prepaid cards, as that term can mean a few different things. The four most common forms of prepaid cards retailers will come across include:
General Purpose Reloadable (GPR) Prepaid Cards
Reloadable prepaid cards are typically issued by one of the major card schemes. They are open-loop, meaning any merchant that accepts credit of debit cards under the corresponding card brand can accept these cards.
Prepaid Gift Card
These are open-loop, card scheme-branded cards like a GPR prepaid card; however, these cards are not reloadable.
Prepaid Debit Card
Prepaid debit cards are like GPR prepaid cards. They are issued as an alternative to checking accounts for those who do not qualify for a banking account or can’t afford the associated fees.
These are essentially the same as a prepaid debit card, but are issued specifically for the benefit of unbanked employees.
There are many reasons a consumer would use a prepaid card. Some use them to make purchases online without a bank-issued credit or debit card, while others believe using prepaid cards help them control personal spending.
Prepaid cards are especially useful for those in developing economies who do not have access to banking. With prepaid cards, million of unbanked consumers can gain access to the online marketplace.
Given that eCommerce is an increasingly-global phenomenon, retailers should expect to see much more of this in the next few years. In fact, the global market for transactions involving prepaid cards will reach $3.65 trillion by 2022.
What About Chargebacks?
Prepaid cards are designed to make it easier for consumers to participate in the global market, but it gets a lot more complicated when chargebacks are involved. Even the simple question “can customers file prepaid card chargebacks?” doesn’t have a concrete answer. To understand why, we need to dive into the history of chargebacks for a moment.
Chargebacks were first introduced as part of the Fair Credit Billing Act of 1974 to encourage consumer confidence in credit cards, as they were still a novel innovation at that time. The thinking went: “if customers know that they won’t be scammed by merchant fraud, they will be more willing to trust credit cards.”
Consumer Protection…or a Tool for Fraudsters?
What percentage of chargebacks are friendly fraud in disguise? The answer might shock you.
Chargebacks have become more associated with friendly fraud in recent years. Despite that reality, though, they still fulfill an important function in providing cardholders with a form of insurance against fraud. However, while Federal law guarantees cardholder the right to file chargebacks on credit and debit cards, the law does not cover prepaid card chargebacks.
The law is specific to card types, rather than the actual chargeback practice, and while debit and credit cards are linked to accounts with an issuing bank, prepaid cards are preloaded with a set amount. Regulations don’t require network-branded prepaid cards to give consumers the same chargeback rights required under Federal law. That said, even though prepaid cards are not covered by the Fair Credit Billing Act, customers still have the right to file prepaid card chargebacks in most cases.
The decision to allow chargebacks is left up to the card provider, and will be outlined in the terms provided to the customer at the time of the card’s purchase. That’s where it becomes a problem for you; by accepting the prepaid card, you give your implied agreement to the same terms that limit the customer. Thus, if the terms give customers the right to file a chargeback, you’re obliged to go along with it.
Uncertainty is a Merchant’s Worst Enemy
You have no way of knowing ahead of time unless you’ve researched and kept up-to-date with the terms of each prepaid card. As a rule of thumb, though, it’s best to assume that a customer has the right to file a chargeback for a few different reasons:
- Prepaid cards often will allow chargebacks.
- Regulation can change at any time; consumer groups have petitioned the CFPB to establish the legal right to file a chargeback on prepaid card sales for several years.
- Customers are used to the “zero-liability approach;” they’re trained to expect another party will be responsible for fraud.
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Of course, this won’t be a problem if you already have a winning chargeback strategy firmly in place. Here’s the real chargeback facts:
- When it comes to chargeback triggers, it doesn’t matter whether your customers check out with prepaid cards, digital gift cards, or with mobile wallet apps. Our research at Chargbebacks911® proves that there are only three potential chargeback sources: merchant error, criminal fraud, and friendly fraud.
- Chargeback mitigation is an intricate, multifaceted process, and no plug-and-play automated solution can deliver lasting results. The only way to see long-term chargeback reduction is to prevent the chargebacks you can, then fight the rest.
- The problem is only going to get worse. Chargeback costs already surpassed $30 billion a year in 2017. We project a 20% annual increase in issuances...and that pattern will hold into the foreseeable future.
Already seeing chargebacks on the rise? Want to get proactive on friendly fraud and other threats to your business’s sustainability? We have the solution.
Chargebacks911 offers the industry’s only proven tools and strategies to tackle chargebacks. No matter the source—credit, debit, or prepaid card chargeback—our combination of proprietary tools and human expertise can deliver the best results possible…period.