Study On Risk Allocation For Debit Card Fraud

In civil legal disputes generated by debit card fraud, the risk allocation between issuing bank and cardholder has become one of the great challenges in the modern payment system, as it not only concerns the realisation of cardholders’ obligatory right, but also relates to the financial consumers’ will of choosing new payment instruments, and the benign development of the whole banking industry. Compared with the direct and definite rules applied in many countries, the current legislation allocating risks in China’s payment system has not embodied specific approaches to settle the civil disputes of debit card fraud. This essay aims at suggesting an analytic framework and designing a relatively equitable, reasonable and general risk-distribution mechanism for these disputes, hoping to guide the judicial practice effectively.During the proposal of legal mechanism, this essay imports economic analysis and identifies that a risk-distribution mechanism of economic efficiency should be based upon two general principles: the loss precaution principle and the loss spreading principle, which incline to allocate more risks to the party who could guard against the risk with lowest cost and who has more abilities to spread the risk.Applying these two principles, this essay classifies practical cases of debit card fraud and designs suitable risk allocation mechanisms to match each classification. It concludes that, in the cases caused in general by technological factors, issuing bank should take strict responsibility for all loss, unless the bank could prove that there is not a causal relationship between the loss and their own behaviour, or that the loss occurred because of the cardholder’s inadvertency, the cardholder undertakes capped liability; however, in the cases under normal circumstances caused by cardholders’ negligence, the cardholder bears the burden of proof of the causality between the loss and the behaviour, unless the cardholder could prove that the loss is caused by the issuing bank or the cardholder’s own behaviour is not the reason of loss, otherwise the cardholder should be liable for the loss up to a limit, with the issuing bank liable for the reminder. This design of mechanisms improves the risk allocation methods in the past which emphasise on the protection of only one party, therefore, this design conforms to the specific circumstances of our country’s economic and legal environment, would benefit the balance of market subjects’ status and target far significance of resolving disputes properly, protecting financial consumers’ rights, enlivening the market of financial products and promoting the development of China’s financial system.