Select Page

Credit cards provide consumers with a fast and convenient method for making payments. However, the problem of fraud is serious, and some credit card customers may wonder who is liable for the payments in the event of credit card fraud. Although it is true that the credit card holder may enjoy protection against fraud, there is still the issue of payment for the vendor, who is also a victim of fraud in these cases.

Growth of Fraud

The recent proliferation of credit card fraud has placed a fine spotlight on the problem. As high-profile corporations and retail stores experience an increase in fraud related to credit cards, many interested external parties are concerned about the issue of payment for these vendors. There are several types of costs associated with credit card fraud, and the amount and type of cost incurred depends on the specific issues involved with each credit card transaction that was completed fraudulently.

Since there can be multiple business and government entities involved in these transactions, the costs associated with fraudulent transactions will involve more than one entity. The best way to understand the costs involved is to break down a typical type of transaction that can occur when there is a fraudulent credit card transaction at a major retailer.

This situation can apply to different types of businesses, so you can simply use this list as a way of getting a complete view of a typical case of credit card fraud:

  1. Credit card fraud will usually involve a certain amount of merchandise. This could be a single item, but it could also be a large quantity of inventory, which actually happened in at least one case involving a major retailer.
  1. The cardholder is immune from liability under federal regulations, which govern cases involving credit card fraud.
  1. The merchant may be responsible for the lack of security measures that could have prevented the credit card fraud from happening in the first place.
  1. The banks can also charge the vendor for certain costs involved in replacing the credit cards. This requires the vendor to pay additional money to the banks to cover these costs.
  1. Large vendors can usually absorb these losses without going completely out of business. However, small companies usually do not have any protection against the massive charges that they could be responsible for in the event of a large case of credit card fraud.
  1. In addition to the losses in merchandise, the small business owner might also get hit with these bank charges to cover the cost of dealing with the fraud. The payment processing company might also contact the small business in order to recover losses that accrue through the account payment system. If the business owner refuses, the processing company can close the vendor’s account, and they can also make it impossible to receive payments through other companies.
  1. Reimbursement payments for fraudulent transactions also hit the banks. Certain popular credit cards will hold the banks almost completely responsible. Local banks are small enough to get hurt substantially by these costs. These small banks may be unable to leverage any payments out of an involved merchant, which makes them liable for most of the costs.
  1. Debit card fraud is also a serious problem, but the good news is that this type of fraud has declined rapidly, and losses can be shared between the vendor and the issuer of the debit card. The actual split of the liability has been as high as 60 percent for the card issuer, and the cardholder still enjoys the same protection from liability with debit cards. A small percentage of the total amount may need to be paid by the cardholder, and this depends on the card.

Additional Liabilities

Another unusual feature of debit card fraud is the issue of who is liable when there is a physical card involved in the transaction. Vendors, merchants and sellers will usually not be liable for payment when a physical card is involved. These payments will be routed to the card issuer. However, the business may need to pay most of the costs if there is no physical card involved. This could be based on the issue of who is liable for security systems when there is no physical card being used for the transaction.