Bank reimburses me for credit card fraud - where does that $$ come from?

Factual Questions
1

Where does the money come from, when my bank restores to my checking account funds that somebody cheated me out of in a credit card transaction?

I ordered furniture months ago using my VISA debit card attached to my checking account, and the delivery date came and went, and only an answering machine answers my many calls now, and I leave messages but they never call back.

So I started looking around on the Web, and turn up hundreds of sites complaining that the company is a scam, a ripoff. Well, great.

So I go to my bank and ask if, at this late date, there is anything they can do. Sure, they say - their fraud department will take my statement and all these forms, and work on it, and I can probably get the money back. It has to do with having used a VISA card. And there were more confusing things about how a debit card and a credit card are really the same thing, or they’re really not, or some combination of the two, but it all has something to do with why I can get the money back.

And, lo, just a few days later, the funds are “provisionally” returned to my account!

My main question: where does this money come from?

I had other experiences with this years ago, so this particular reimbursement is actually the 9th one I’ve had, although it’s the only one in the last 8 years or so. All the other “provisional” replacements became “permanent” or “resolved” or something weeks later. None of them got challenged or undone.

They can’t be magically sucking this money out of the scammers, can they? I mean, there’s nothing there but a post office box and a disconnected phone, both registered to a nonexistent name, right?

Does my bank just eat the expense?

Or does the VISA company itself? It’s not very big, is it? Only 1000 employees, and when people think about their own VISA card, mostly they are thinking about some bank that has issued them the card with a credit account, not VISA themselves, right?

2

Yes. It comes from the bank’s cash reserves. They know they’re going to have a certain amount of fraud, and the cardholder agreements (and certain federal regulations) stipulate that they have to reimburse for fraud in certain circumstances. The Visa company doesn’t pay – they just run the network and collect processing fees. The bank that issued your Visa (whether it’s a credit or debit card) handles the actual money, so they get stuck with the bill.

3

Surely they don’t just eat the expense. They go after the retailer for their money back, right?

4

And guess where those come from.

5

I’m sure they try to. Who knows if there’s even anybody left to go after if it was a true scam operation. Sometimes even legitimate retailers go bankrupt suddenly and don’t complete their orders. In that case the bank can get in line behind other creditors (if the value is significant.)

The bank may also have insurance coverage for some types of fraud.

6

My company does about 1 or 2 fraudulent sales each year (unbeknownst to us - we sell software online and sometimes people use stolen credit card numbers to get the software) and the credit card company does come to our card processing company who then comes to us and asks for the money back (plus a processing fee!) and then the credit card company/bank is not out any money.

But, that’s just one example. They get their money back because we’re not a scam company and we’re not interested in losing our card processing capabilities or going to court. If we were NOT in that position, well then someone else would have to pay up, yeah.

7

There’s also Insurance for the Bank. Big banks don’t really need it.

8

>And guess where those come from.

A perceptive question. What I hope is a perceptive answer: for practical purposes, approximately 100% of my bank’s cash reserves come from all the other customers.

9

Yes, it’s built into the fees the customers pay. Like other kinds of fraud, such as shoplifting, the legitimate purchasers are effectively paying into the store’s insurance pool.

And an interesting thing about credit cards…banks traditionally shied away from poor credit risks until some smart financial guy showed they could make more money from the near-deadbeats than the riskless. Just charge enough in fees and interest to cover the extra expenses and losses.

Destroy your credit rating and you’ll be deluged with credit offers. They’re all ridiculously expensive for the consumer and profitable to the creditor.

10

You don’t by any chance sell something with “Zombie” in the title, do you? :slight_smile:

11

My knowledge is based purely on the UK banking system. I’m sure there are similarities and differences between what I know and other countries’ systems.

In the UK you’re a lot more protected when using a credit card than you are using a debit.
We’re at a point where many people get credit cards just to use online, for fear of fraud. (Mostly everyone who gets a bank account gets a debit card automatically)

The way the law lays out the rules for lenders, you can think of it as they’re buying the product from the supplier and then you’re buying it from them.

For instance, if you bought an item on your credit card and it broke down within warranty period but the retailer and manufacturer no longer existed you can make the credit card company repair or replace the item.

In the same vain, you can go to your credit card company and say “I never received that furniture I ordered online, so I’m not paying for it”

I’m overly simplifying, but I hope you get my point.

Once this worked really well for my mum. She bought all new windows for the house on finance. They started leaking and falling apart after we’d payed for about a third or a half of them. The company that installed them had gone bust (Wonder why) so my mum requested the finance company sort them out.
Instead they suggested they would let her off the remaining balance if she sorted out her own repairs. Saved thousands as my Dad was quite capable of fixing them.

12

>In the UK you’re a lot more protected when using a credit card than you are using a debit.

Well, that’s the confusing thing. Over the years I have heard that true credit cards offer more protection here in the USA than debit cards do. But, I’ve also heard “they’re ALL credit cards, really” and they offer the same protection.

I can think of two reasons why I would expect a true credit card - I mean, a VISA card attached to a revolving loan account - would be able to offer more protection. One, the institution who’s in the middle is making loads of money on interest if there’s a loan, and I’d think much less on little fees here and there if there is only a checking account. And, two, market pressures would drive lenders to do more to help out the purchaser, who might try to not pay back the loan if he feels cheated. Maybe he’s still obligated to pay, but collection agencies wouldn’t exist if a loan’s worth to the creditor the entire payback amount on average.

>some smart financial guy showed they could make more money from the near-deadbeats …

A friend who’s a high-powered analyst for a big credit company tells me they devise their marketing plans to attract the “Minnesota carpenter”. This is a stereotypical fellow who makes pretty good money every summer, so he always catches up on his account, but he also falls behind every winter, incurring all kinds of penalties and extra fees. Moreover, he’s not a very sophisticated financial planner, and is inclined to pretend the credit card company isn’t taking much more of his earnings than he should let them. He’s going to go through pretty much his entire working life within a few thousand dollars of dead even, one way or the other, even though he’ll spend tens of thousands on interest on the same few thousand dollars revolving in and out every year.

13

Once upon a time, the credit card companies would send out pre-approved credit cards in the mail. To nobody’s surprise, these cards would at times fall into the hands of somebody other than the credit card user. Who was liable for the resulting charges.

Now Congress could have banned that practice. But Senator Proxmire had a better idea. Shift liability to the professionals, the credit card companies (ie the banks), then let them do what they want.

Suddenly, banks became much more interested in security, once they would have to pay for the consequences of their behavior. Now they send offers in the mail rather than actual credit cards, and have beefed up their security departments.

As a rule, producers are specialists while consumers are generalists. In this case, the consumer’s liability is limited to $50 for credit cards; debit cards have no such legal limits, though some banks will extend similar policies to debit cards.

Or claim to: in my experience the grace period for reporting debit card theft tends to be shorter than for credit card theft, a fact which is not emphasized. It’s easy to bamboozle a generalist.

14

Every bank has a fund set aside for fraud or bad loans, etc. It is SOP. I was on the board of a Credit Union for many years and I know that in BC, at least, it is the law that a bank must set aside a portion of earned income for such a fund. The larger the institution, the larger the fund.

The Canadian big banks are really big, and I believe they do their own “insuring”, and don’t have outside insurance for this purpose.

15

Double-edged sword, that.

  1. The bank policies on VISA/Debit and VISA/Credit etc etc etc generally make the risk level the same for both products.
    however!!!
  2. The federal reg. in question is Reg CC. Reg CC provides very strong protection for credit cards transactions. The applicable regulation for credit cards, which title I forget, does not provide the same level of protection.
    If the chips are down and the banks change their policies, Reg CC will still be there to protect you.
16

As far as where it comes from, it may be worth noting that some credit card processing companies have an escrow process.
When I tried to get CC processing from Charter One bank locally, they were going to hold my funds for 60 days before handing them over to me.
In cases like that, the merchant most assuredly will not be getting the OP’s money… the only loss to the bank is going to be disputes that come in between 60 days and 180 days.

17

A) Now, some of our clients are speculating that the price of gold will rise in the future. We have other clients who are speculating that the price of gold is going to fall. They’ve placed their orders with us and we buy or sell their gold for them.

B) Tell him the good part.

A) The good part is that no matter whether our clients make money, or lose money, Duke & Duke get the commissions. Well, what do you think, Valentine?

C) Sounds to me like you guys are a couple of bookies.

A) I told you he’d understand.

  • Trading Places