Chargeback The Pub

Chargebacks have become an unfortunate inevitability in the big-spender’s world of adult nightclubs. What steps can you take to prevent chargebacks, and how much damage can be done to your merchant processing if you don’t take these steps? Attorney Clyde DeWitt explains.

Conventioneers Moe, Larry and Curly saunter into your club after dinner and a few—or maybe more than a few—adult beverages. One private dance leads to another; one more rounds of drinks leads to another; and pretty soon the tab is in the stratosphere. Moe says, “It’s on me,” handing over his plastic. This is wonderful, right? Well, as you may know, maybe not.

Moe’s wife or employer sees this charge, exclaiming, “What the hell is this?” “Must be some scam,” says Moe, a little red in the face. So, for Moe to save his job or his marriage, he reports the charge as fraud. You get a notice; and if you don’t respond properly and on time, you are out the tab, and worse.

Plastic Axiom: Merchants need the “plastic empire” profoundly more than that empire needs merchants. Read that sentence again. As explained in this article, the plastic empire does pretty much what it wants with merchants.

Perhaps the biggest lobbying effort by banks was bankruptcy reform. Back during the Bush II administration, the banking lobby managed to persuade Congress to effectively eliminate consumer bankruptcies (The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005); people could no longer engage in the long-standing practice of wiping out their credit card debt in bankruptcy.

But you look at credit cards from a different angle. You worry about customers whose credit cards do not have a high enough limit to cover their bill. And, worse, customers who charge back their tab from the night before.

How the credit card system works is really quite something. Having often fought against merchant processors, the author has unfortunate familiarity with all of this.

Use of credit cards became increasingly prevalent during the 1970s, fueled by Congress’ enactment of 15 U.S.C. § 1643(a)(1)(B), limiting the cardholder’s liability for unauthorized use of his or her card to $50. The law goes on to say that the cardholder is not responsible for any charges after giving notice of the missing card. And even if the consumer hasn’t given notice, the $50 cannot be charged unless the card issuer has jumped through all kinds of hoops. As a practical matter, banks usually waive the $50 anyway; it is worth it to keep happy customers. The obvious significance of this 1970 legislation was to allow the masses to carry credit cards without fearing financial disaster if they were lost.

The credit card industry, and particularly the bank card industry, continued to thrive. Merchants could not compete unless they accepted credit cards, especially bank cards.
Meanwhile, banks began retreating from the business of directly issuing VISA and MasterCard merchant accounts in favor of what are known as “independent sales organizations,” or ISOs. These ISOs include the infinity of companies that constantly bombard most of you with spam that tells you how favorable their rates are.

Visa U.S.A., Inc. has regulations that include a two-volume set consisting of hundreds upon hundreds of pages. Even the table of contents is a couple of dozen pages long! Every VISA transaction, every VISA merchant account agreement, every VISA statement and everything else about VISA cards is governed by this two-volume tomb.

In fact, the Visa U.S.A., Inc. operating regulations undoubtedly is amongst the most important documents in commerce today, perhaps the most important document in e-commerce. Want a copy? Not! The bottom line is an imponderable paradox: The agreement you signed when you applied for your VISA merchant account (bet you didn’t read it!) requires that you comply with all of the VISA regulations. And yet, you are not provided a copy of, nor can you even obtain a copy, of the confidential regulations.

As a merchant, you have signed on with VISA and, therefore, 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, and supporting documentation comes from the merchant. The response must be in a format set forth in the regulations, and must include specified data.

The regulations include very detailed and streamlined mediation and arbitration procedures, without which the entire credit card world would come to a screeching halt. And know this: On the merchant end of this, you will wind up with a chargeback if you fail to “dot all of your i’s and cross all of your t’s.” Remember, this system is designed more to facilitate happy cardholders than happy merchants.

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.

Auditors have an old saying: “If people can steal, they will steal.” Plastic is no exception. The advent of the credit card brought with it a whole new field of scams the likes of which the world had never seen. Credit cards can be stolen and forged. Crooks have engineered a myriad of ways to make a quick grab of tons of money or, in some cases, merchandise, before anyone can figure out what has happened. By the time someone does figure out that something is amiss, the crook has long since looted the bank accounts and ridden off into the sunset with the cash in his saddlebags.

Too many chargebacks, misrepresenting the nature of your business on the application, unauthorized processing for someone else and any of a number of other transgressions can garner termination of your merchant privileges. The worst part of this is that it gets you—any everyone associated with the business—added to the Terminated Merchant File (also known as “MATCH”), so you will be unable to obtain bank card processing anywhere else.

Despite the fact that a card holder invariably can have a charge removed from his or her card without penalty, (1) it is a nuisance and (2) not everybody reads their card holder agreement so carefully as to know their rights. Cardholders can feel that they have been imposed upon, that their privacy has been invaded and that the card issuer has caused them a nuisance.

The result of all of this is that the credit card industry is doing much to combat fraud in general, and chargebacks in particular. That is why merchant accounts are no longer carelessly issued.

When you apply for a merchant account from an ISO, you will be presented with an application form. The application form includes many questions, some of which are very personal. Inaccurate responses can be fatal and will lead to having your merchant processing privileges revoked as you’re stuck in the dreaded Terminated Merchant File.

In particular, many merchants had their processing privileges yanked during the mid-’90s because aggressive sales personnel from the ISOs simply said, “Just sign the form; I will fill it out for you.” Nice guy, right? Wrong! The sales people from the ISO were presumably were working on commissions and, therefore, were very enthusiastic about having their customers’ applications approved.

Years later, when this package of merchant accounts was being sold from one ISO to another—for the second time—someone culled through the package and found that a number of merchants had misrepresented what they were doing. In one particular case, the company was in the adult-video mail order business, not in the brick-and-mortar sales (physical store) operation listed on the application. The acquiring bank did what it was required to do under the merchant-processing agreement, which was to disconnect the merchant-processing rights, suck almost limitless amounts of money out of the merchant’s bank account for “chargeback reserves,” and put the merchant in the Terminated Merchant File. The moral of the story, of course, is to be absolutely sure that the application is completed with unqualified accuracy!

Too many chargebacks, misrepresenting the nature of your business on the application, unauthorized processing for someone else and any of a number of other transgressions can garner termination of your merchant privileges. The worst part of this is that it gets you—any everyone associated with the business—added to the Terminated Merchant File (also known as “MATCH”), so you will be unable to obtain bank card processing anywhere else. Merchants who cause chargebacks are treated the same way as check bouncers; a fee is imposed, coupled with increased penalties and, in the worst cases, privileges are revoked (although one wonders whether the banking industry has fallen short when it comes to policing check bouncers).

If you establish a merchant account, you may come to wish that you hadn’t. MasterCard’s TMF identifies merchants, and principals of merchants, that acquiring banks have terminated for specified reasons. The regulations mandate that acquiring banks must add a merchant and its principals to this so-called TMF if terminated for enumerated reasons including, most significantly, excessive chargebacks.

The acquirer is on the hook for adding or deleting a merchant from the TMF; it has to defend itself and Visa. But if a merchant is wrongfully tagged with TMF status, any dispute about it will likely be subject to the arbitration provision in the merchant agreement. And because arbitration rules generally specify that the parties each pay half of the arbitration costs (which are substantial), you are also stuck with your own attorney’s bill and half the cost of the arbitration. A bank can lose its card-issuing privileges if it fails to follow the TMF rules.

The moral of the story is this: Don’t take merchant processing for granted—it is the engine that runs your club.

Clyde DeWitt is a Las Vegas and Los Angeles attorney, whose practice has been focused on adult entertainment since 1980. He can be reached at 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.)

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