A multi-million-dollar lawsuit filed against MasterCard International by Paycom Billing Services Inc., which specializes in processing card transactions for web merchants, charges that MasterCard's policy of imposing financial penalties against web merchants for chargebacks is unfair and results in higher fees intended to deter fraud. Although Paycom processes transactions mostly for adult entertainment sites, which are considered more susceptible than other e-retailers to chargebacks, attorneys who represent other types of retailers say the issues raised by the Paycom suit could affect a broader range of merchants.
Dennis Ehling, Paycom's attorney in the MasterCard case, says the suit contends that the card association imposes overly strict rules that result in web merchants paying excessive fees to cover fraud, even though web merchants are required to absorb losses related to chargebacks. Paycom seeks over $40 million, including $20 million in unspecified damages and $20 million in punitive damages, Ehling says.
MasterCard, in a statement released regarding the Paycom suit, denies that its policy is unfair. The complaint, it says, "is nothing more than a brazen attempt to avoid complying with MasterCard rules that are designed to protect consumers, merchants and MasterCard’s member financial institutions."
Among those rules are a requirement that MasterCard acquiring members have a direct agreement with each merchant that accepts MasterCard cards for payments and be able to verify that each merchant operates a bona fide business. It notes that the Internet enables web merchants to avoid these rules by linking their customers to a separately operated web business, such as Paycom, for processing payments. One concern that this presents, observers say, is that it can be harder to track where chargebacks originate.
MasterCard contends that web merchants can now avoid responsibility for chargebacks by participating in its SecureCode program, which requires card users to enter a personal identification number when making an online payment. The program began last fall, but MasterCard has not released figures on the number of participating retailers.
Ehling, meantime, notes that MasterCard's policy is to begin imposing penalties ranging from $25 to $100 every time a web merchant's monthly rate of chargebacks reaches 1%; if the that rate is reached in consecutive months, the penalty rises as high as $100, Ehling says. MasterCard declined to comment on its penalty policy.
By contrast, Ehling says, Visa U.S.A has a more realistic policy, charging the same range of penalties but only
when the chargeback rate reaches 2.5%. "That's justifiable, because the average chargeback rate for Internet transactions is 2.1%, Ehling says. In the offline world, retailers faced with chargebacks don't have to absorb the loss unless it's proven they conducted a fraudulent sale.
He adds that several other types of web merchants, such as sports and music sites that sell digital content, are also prone to high chargeback rates and may also be subject to higher penalties. Although Ehling represents several types of web merchants, however, he says he knows of no other intentions to sue MasterCard. MasterCard did not comment on whether it targets adult web sites with chargeback penalties more than it does with other types of merchants.
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