Since VISA, MasterCard and American Express established their footholds in the 1970s, only Discover has emerged to offer any notable competition. American Express' Optima card is new, but it's nothing more than an American Express card with a credit line; Diner's Club has dwindled into comparative oblivion. And not only do VISA and MasterCard maintain a seemingly unbreakable monopoly over the charge card market, VISA out-guns all of the other cards combined.
It should be noted that VISA and MasterCard operate differently than American Express and Discover. The former - the bank cards - operate through a network of issuing banks. In contrast, you can get an American Express card only from American Express and a Discover card only from Discover; and American Express and Discover perform all of their credit card functions themselves: If you want an American Express card, contact American Express; if you are a merchant and you want to accept American Express cards, contact American Express. Indeed, as American Express proudly proclaims, "American Express has a proprietary, closed-loop system that handles every aspect of the transaction process, and which operates separately from the bank card systems of VISA and MasterCard." In fact, if you want American Express merchant processing privileges, just check out www.americanexpress.com. You can download an application form and fax it right back to them.
VISA - which for the purpose of analysis here is no different than MasterCard - begins with the looming omnipresence of Visa U.S.A., Inc., a Delaware corporation that connects all of the banks together. Observe the following diagram:
All of this is regulated by what's on top - Visa U.S.A., Inc. Operating Regulations, a tome covering every imaginable aspect of VISA card processing. As explained in Part I of this series, the credit-card world revolves around that book of regulations.
When you're on the cardholder side of the transaction, you go to an issuing bank - Chase, CitiBank, Wells Fargo, Bank of America, etc. It's doubtful you could find a bank where you could open a personal checking account that isn't also in a position to issue you a VISA, a MasterCard or both. Many offer cards featuring the logo of your favorite football team, the university from which you graduated, a car company, frequent flyer miles, - the list is almost endless - and while you're at it, how about one for your spouse and your teenagers, too?
If you're on the merchant side, you deal with a merchant bank, known in credit-card-processing parlance as an "acquirer." However, it is becoming less the norm for acquirers to deal directly with merchants. Instead, ISOs, or "independent sales organizations" - so-called third-party processors, also known as "third-party servicers" or "independent contractors" under the VISA regulations - act as intermediaries between the acquirers and the merchants.
Significantly, ISOs are very strictly regulated under the Visa Operating Regulations. For example, member banks must strictly control them. They are required to regularly provide specified information to member banks, are subject to periodic audits and reviews, and can be bounced out of the VISA system - not only for obviously improper activities such as fraud, but also for "operating in an unsound, unsafe manner" or for activities "that may result in undue... damage to the goodwill of the VISA system...." The Operating Regulations include, not insignificantly, an entire section enumerating penalties for violating the various regulations; generally, the penalties are not insubstantial.
The Regulations require, as you might expect, that the acquirer bank have a "Merchant Agreement" with each merchant; the agreement should explain the expected provisions and rules governing your account. In processing this agreement, the acquirer is required to obtain specified information from the merchant concerning its identity and form of operation.
Once you've signed your life away and opened a VISA merchant account, presumably, your contented customers will purchase whatever products or services are offered by your business, some paying by way of a VISA card. In theory, at the appropriate time, your representative will "swipe" the card - either electronically or by making a carbon-copy impression - and obtain what VISA calls an "approval response," via electronic processing or by calling Visa. The approval response, or "approval code" in merchant parlance, is nothing more than the Visa computer telling you that the card is a valid one and that the transaction is not at odds with the customer's credit ceiling.
Obviously, the approval response does not guarantee that the person handing you the card is who he says he is; it does not guarantee that there will not later be a dispute about the charge; it does not guarantee that the card is not stolen (but has yet to be reported as such); it does not guarantee that the customer will be content with the purchase. But if the customer is on the up and up and ultimately is content with the transaction, you know that the money will find its way to your bank account - less the transaction fees - in relatively short order.
However, no business is perfect. Sooner or later, no matter how careful you are, one of these credit card transactions will come into dispute; as you might expect, Visa's regulations include extensive treatment of the procedure to follow in the event of a dispute.
The dispute starts when the issuer (i.e., the bank that issued the credit card in the first place and which sends the monthly bill to the cardholder) hears the fuss from the cardholder. A complaint that the food at the restaurant didn't taste very good likely will fall on deaf ears; on the other hand, a complaint that the cardholder had never been to the restaurant, did not authorize the charge and has never relinquished possession of the card will almost certainly swing the issuer into action.
But that's hardly the end of the story. Let's assume that the merchant, who we'll call "Joe," owns two restaurants, one in Chicago called "Eat at Joe's" and a mini-version in Peoria known as "Joe's Cajun Hamburgers." As it turns out, our cardholder went on a business trip to Peoria, charged her lunch at Joe's Cajun Hamburgers, forgot the details, and then couldn't figure out why her VISA statement included a charge from Eat at Joe's in Chicago, where she had not been in years.
"Stupid customer," says Joe. "Why didn't she just compare her charge ticket with her bill; then she would remember that the $15.45 charge was for her lunch in Peoria, especially since the Cajun hamburgers there are so sumptuous." Well, he might be right. But even if a lot of Joe's customers are, in fact, stupid, he should always remember that their money is not.
So how might Joe have prevented this from happening in the first place? For one thing, he would be well-advised to make sure that the charge on the statement reflects the fictitious business name and city associated with the restaurant at which the food was consumed. It might also help to arrange for an "800" number to be placed alongside each charge on the cardholders' statements - and when the phone rings, respond. Although the latter may prove to be a hassle, its inconvenience pales in comparison with what will happen if the customer calls the bank instead of calling your business. Also, answering the "800" number provides a measure of quality control.
But suppose that the cardholder in fact does call her card issuer claiming that there is a $15.45 charge on her bill for a place in Chicago called "Eat at Joe's," that she hasn't been to Chicago since her great aunt died 25 years ago, that she has never heard of a restaurant called "Eat at Joe's," and that she probably wouldn't go there anyway because she only eats Cajun food? Visa dispute resolution kicks in.
Understand that, from a legal standpoint, merchant processing is a colossal, multi-party contract. At the most elemental level, a contract is simply an agreement to exchange something for something, often a promise for a promise. Suppose that Mr. A promises to deliver his goat to Mr. B, in return for which B promises to pay A some amount of money (probably the going rate for goats). If a contract is complicated, or if those involved do not trust one another (and nobody trusts anybody these days), the contract generally will be in writing.
Good contracts usually contain provisions both to avoid disputes and to resolve them should they occur. For example, if the seller of the goat is in Montana, the goat is in Utah, and the purchaser of the goat is in Colorado, it is a good idea to include in the contract the mechanics of the transaction - such as how and when the goat will be transported from Utah to Colorado and which party will pay for the shipping - along with provisions in case something goes wrong - such as identifying which party bears the risk of loss if the goat dies during shipping (best, an insurance company) or what happens if shipment by truck is scotched by a Teamsters strike - and, finally, provisions for resolution. The latter might include an arbitration provision, a provision for choice-of-law and location of any dispute resolution and, perhaps, a provision for prevailing-party attorneys fees.
All of the above terms likely would be negotiated between A and B or between their attorneys. Most significantly, if A and B are unable to come to terms, A will likely try to find another buyer for his goat and B will search for an alternative goat.
Contract principles as applied to Visa begin with what in essence is a giant, multi-party contract involving Visa, its member banks, the acquirers and the issuers. The hub of the agreement is that all will agree to be bound by the Visa Operating Regulations; any member uncomfortable with that is free to disengage. In turn, the issuers and acquirers issue cards and merchant accounts, respectively, consistent with the global agreement involving Visa and the banks. As a merchant, therefore, you are bound by these Operating Regulations; at least in theory - which is about as far as it goes - if you don't like the Visa regulations, try MasterCard, American Express or Discover. As a practical matter, however, you know better.
There are only two things working in your favor in this regard: First, although general rules of contract would dictate that Visa is free to write its agreements and regulations any way it wants, it is not free from regulation by Congress, the Federal Trade Commission or other governmental bodies, most of which at least ostensibly are looking out for the good of the parties with minimum bargaining strength. Second, Visa is not alone in the market. Just as a not-insignificant number of merchants might choose not to accept a particular credit card because of exceptionally high processing fees, merchants might jettison another of the cards because of overwhelming administrative difficulties. Whether Visa has too much monopoly power is beyond the scope of what we're talking about here, but they do need to make reasonable accommodations, first for the cardholders and second, for the merchants; otherwise the system will break down, paving the way for competition.
As a merchant, when you signed on with Visa, you agreed to adhere to its contractual requirements, including its dispute-resolution procedure. That procedure starts when the issuer registers a "retrieval request" from the issuer to the acquirer. The acquirer must respond with support for the transaction, which supporting documentation comes from the merchant. The response must be in a format set forth in the Regulations, and include specified data.
In the "Eat at Joe's" example, the merchant, through the acquirer, would produce to the issuer the required documentation, establishing that indeed the card was swiped and the signature obtained, presumably only after consumption of the Cajun cheeseburger in Peoria. If that doesn't settle the controversy, it then goes forward according to Visa resolution procedures.
What is most important here is that the acquirer, and therefore the merchant, bears the burden of establishing the validity of the transaction. Failure to meet that burden results in a chargeback - in which case the restaurant would be out its $15.45 plus chargeback processing fees; it also is potentially subject to endless miseries thereafter if a recurring chargeback problem evolves (as will be discussed more thoroughly in future issues). Also, the dispute resolution procedure does not involve going to court. Rather, the Regulations include very detailed and streamlined mediation and arbitration procedures, without which the entire credit-card world would come to a screeching halt. Also know that, as a merchant, you'll probably end up with a chargeback if you don't follow the regulations to the letter; remember, out of necessity, the system is designed to facilitate happy cardholders far more than it is happy merchants.
Parenthetically, you may have noticed that some department stores now have electronic credit-card machines where you sign your name on some small plastic screen, rather than on a piece of paper. What these little gadgets facilitate is the electronic keeping of transaction records, including signatures (although it's next to impossible to write a signature on one of those things that even remotely resembles the same person's signature on paper) so that responses to retrieval requests can be totally electronic.
The mechanics of dispute resolution with respect to MasterCard are materially identical to that of Visa. American Express and Discover differ only in that the issuer and the acquirer are all rolled into one.
Next: problems with excessive chargebacks and e-commerce.
(Clyde DeWitt is a partner in the Los Angeles, California law firm of Weston, Garrou & DeWitt. He can be reached through AVN Online's offices, at his office at 12121 Wilshire Boulevard, Suite 900 Los Angeles, CA 90025 or over the Internet at [email protected]. Readers are considered a valuable source of court decisions, legal gossip and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.)
