Credit Card Dispute

April 25, 2022 | 12 min read

Credit Card Dispute Process

The Credit Card Dispute Process Guide for Cardholders & Merchants

There are few messages that merchants dread more than credit card dispute notifications. Not only do they mean you’re losing a sale and possibly a customer, but they also could mean a chargeback is sure to follow.

In this guide, we’ll explain what credit card disputes are and how the process works for both cardholders and merchants. We’ll explore how disputes affect each party, and what you can do to resolve these disputes as quickly and easily as possible.

What is a Credit Card Dispute?

Credit Card Dispute

[noun]/* kre • dǝt • kard • dis • pyōōt/

A credit card dispute, also known as a credit card chargeback, occurs when a customer disputes a transaction with their issuing bank. The bank files that disagreement on the cardholder’s behalf, overturning the sale, then claws the funds back from the merchant and returns them to the customer.

Let’s start with the basics. A credit card dispute is essentially a payment reversal, conducted by the bank on a customer’s behalf.

Let’s say a customer finds a transaction they don’t recognize on their billing statement. The buyer can call the bank which issued the card to report the charge. The bank will then investigate the claim. If it appears to be a fraudulent charge, or a case of merchant abuse, then the bank can file a credit card dispute on the cardholder’s behalf.

Banks can also file disputes tied to transactions which contain specific merchant errors. If the buyer can’t resolve the issue independently with the seller, then the bank can step in to recover the money.

How Do Credit Card Disputes Work?

Payment disputes are like insurance against fraud for cardholders. They ensure that consumers won’t be financially devastated by unauthorized credit card use. Disputes also protect against bad actors who try to scam buyers with defective goods or services.

It’s crucial to distinguish between a chargeback and an ordinary refund. There’s a big difference; many people, however, fail to see the contrast.

In either case, the customer gets the original funds back, and the seller loses the revenue from the sale…so what’s the difference? If we compare chargebacks and refunds, though, the difference quickly becomes apparent:

REFUND:

  • The customer deals directly with the merchant to resolve the issue.
  • Goods are returned to the seller, making it possible to resell for future profit.
  • The merchant loses the interchange fee and other overhead costs.
  • Does not damage the merchant’s standing with the acquiring bank.
  • Can be processed immediately; cardholder recovers funds in a few days.

CHARGEBACK:

  • The customer bypasses the merchant and goes straight to the bank.
  • The customer has no incentive to ship goods back to the merchant.
  • The merchant still loses their overhead costs, but must also pay an additional chargeback fee.
  • Hurts merchant’s chargeback-to-transaction ratio & long-term sustainability.
  • May take weeks, or even months, to finally resolve.

It’s in everyone’s best interest to avoid a credit card dispute. Of course, there are certain situations in which a credit card cardholder is entitled to file a dispute, and it ends up being the only viable option.

The Credit Card Dispute Process: Step by Step

The credit card dispute process can be confusing…but if you’re reading this, you probably already know that. The basic steps of the credit card dispute process are as follows:

Initial Dispute

Initial Dispute

The process starts when the cardholder challenges a transaction by contacting the issuing bank. Each individual transaction presents a separate potential chargeback. So, if more than one transaction is in question, multiple chargebacks may be filed.

Provisional Refund

Provisional Refund

The bank issues a conditional refund to the cardholder. The issuer then attaches a reason code to the claim and sends it along to the acquirer.

Chargeback

Chargeback

The issuer recoups the money from the acquirer, who will then debit the amount of the original transaction, along with any applicable fees, from the seller’s account.

Merchant Reviews Claim

Merchant Reviews Claim

The seller has the option to review the chargeback documentation, and decide whether they want to fight the dispute and try to recover their money.

Representment

Representment

The merchant gathers evidence, along with other documents like a rebuttal letter and a Chargeback Debit Advice Letter, and re-submits the transaction to the bank.

Bank Review & Decisioning

Bank Review & Decisioning

The issuing bank reviews the new information. They will either rule in the merchant’s favor and uphold the original transaction, rule in favor of the cardholder. In some cases, the bank might accept the represented transaction, but still file a second chargeback anyway for a different reason.

Arbitration

Arbitration

If the banks, merchant, and cardholder can’t come to an agreement, then the card network will step in. The card network (Visa, Mastercard, etc.) will review the case, then issue a final ruling.

This process is based on decades of technology updates, rule changes, and increasingly-complex regulations. And, all of it is built onto a system created half-a-century ago. On top of all that, we must account for adaptations based on card networks, reason codes, and countless other variables.

Even when rule updates are introduced with the goal of simplifying processes, we can still see unintended consequences and confusion. Part of the problem is a lack of standardization. Different card brands use different terminology, processes, and rules for different stages of the credit card dispute process.

Chargebacks are complex. We make them simple.

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Visa Credit Card Dispute Process

The life cycle of the Visa dispute underwent considerable changes with the adoption of Visa Claims Resolution back in 2018. The most significant changes were Visa’s overhaul of their chargeback reason code list and the introduction of the Allocation and Collaboration workflows.

When a customer files a dispute, the incident will be sent through the “Allocation” workflow if it is designated as a “Fraud” or “Authorization” -related dispute. It goes through a Collaboration workflow for other disputes.

Learn more about the Visa dispute process

Mastercard Credit Card Dispute Process

Like Visa, Mastercard also introduced changes to their credit card dispute process in recent months. The Mastercard Dispute Resolution initiative rollout process wrapped up in April of 2020.

Despite the changes brought with MDR, however, the bulk of the Mastercard chargeback process remains the same.

Learn more about the Mastercard dispute process

When Can Cardholders File Credit Card Disputes?

Like we mentioned above, there are two general situations in which a customer is legally entitled to claim a chargeback: criminal fraud, or merchant error.

For example, let’s assume a cardholder sees an unauthorized transaction on their billing statement. The cardholder calls the bank, which examines the transaction and concludes that it is a fraudulent charge. The bank files a chargeback to recover the cardholder’s funds. In this case, the purchase happened because the merchant’s defenses were not strong enough to detect the fraudulent charge. So, the merchant is forced to take responsibility.

In another case, let’s assume that a cardholder places an order, but the item that arrives is not what was advertised. The customer contacts the merchant for a return, but the merchant has inconsistent customer service, and the buyer gets no response in a reasonable timeframe. This is another case in which the cardholder is justified in filing a chargeback.

The rule of thumb for determining whether a chargeback is valid is to gauge whether the customer has any other reasonable option to resolve an issue. A credit card dispute should always be the last resort for cardholders once all others are exhausted.

When are Cardholders NOT Entitled to File Credit Card Disputes?

So, we know customers are entitled to a chargeback whenever criminal fraud is involved. We also understand customers can ask for a chargeback in case of merchant error, assuming the buyer already made a good-faith attempt to resolve the issue through the proper channels.

However, you might be surprised to learn that six out of every ten credit card disputes don’t fall into either category. These disputes are known as “friendly fraud.” It’s a situation in which the customer files an invalid chargeback. This is usually due to confusion or lack of understanding on the cardholder’s part.

Some of the most common friendly fraud triggers include:

  • The customer wanting to return an item but avoid a restocking or handling fee
  • Buyer’s remorse
  • The merchant's return process seeming too complicated or cumbersome
  • The consumer misunderstanding the delivery schedule
  • The customer wanting a refund after the allotted time limit has expired
  • Purchases made by family members without the cardholder’s knowledge
  • The cardholder not recognizing a transaction on their billing statement
Learn more about friendly fraud

Do Cardholders Pay for Credit Card Disputes?

Unlike merchants, cardholders don’t face many consequences for chargebacks or credit card disputes (more below). Typically, if a cardholder follows the rules and lodges a dispute for a legitimate reason, there shouldn’t be any fees or penalties incurred to exercise their right to dispute. However, that isn’t to say that there aren’t consequences if a cardholder misrepresents any of their information.

For example, if a cardholder has disputed a charge for any of the reasons listed above, they have committed friendly fraud. While some of those circumstances might not be malicious, the cardholder still bears responsibility for the transaction. If a merchant challenges the dispute and wins, the cardholder may lose the funds they wished to have returned and may lose some account privileges with their issuing bank.

If cardholders are found to be abusing the chargeback process, they could face fees and penalties from the bank, as well as blacklisting by the merchant. For repeat incidents, the bank may freeze, or even terminate the customer’s bank account. This would negatively impact that individual’s credit score.

Here’s the best advice we can offer cardholders: never dispute legitimate transactions. A credit card dispute should be a last resort only.

Can Merchants Win Credit Card Disputes?

The short answer is yes. Like we discussed earlier, merchants have the option to fight invalid disputes through representment. How does this work, though? What's the answer for how to win a credit card dispute?

If a merchant gets hit with a credit card dispute, the first step is to identify the chargeback source. They need to be confident that the customer’s claim is neither genuine criminal fraud nor merchant error. Trying to dispute a legitimate chargeback would be like calling the customer a liar.

Representment is a litigation-based process. The seller is essentially creating a case to demonstrate the customer’s claim is not valid. There are two key components to this process: compelling evidence and a rebuttal letter to give your evidence context.

Both items must strictly follow the bank's or card network's specific guidelines; unfortunately, the situation must also be handled quickly. You have a limited timeframe to initiate the representment process and compile your case (usually seven days total, including document delivery time).

Learn more about representment

Can Merchants Prevent Credit Card Disputes?

Again, the answer is yes. There are several basic practices that might help merchants prevent disputes and lower their chargeback costs. Three of the most basic dispute-preventing moves that we recommend include:

Credit Card Dispute

Being a Customer Service Pro

Merchants can avoid many chargebacks by making it easier for customers to reach out to them. This means providing prompt, helpful responses to all phone, email, and social media inquiries and making sure your contact information is easily visible.

Credit Card Dispute

Pay Attention to the Details

Billing descriptors and other pertinent merchant information should be clearly identifiable to your customers. These are commonly overlooked dispute triggers, as cardholders may be unable to identify merchants by these indicators.

Credit Card Dispute

Be Up-Front About Merchant Policies

Sellers should clearly present all information up-front. This is especially true for anything related to fees or charges that customers are likely to encounter. Tax, shipping and handling, and return policies should be recognizable to customers.

Learn how to prevent chargebacks

Know When to Ask for Help

Every minute that a merchant spends focused on a credit card dispute is time not spent serving customers and growing their business. Fortunately, Chargebacks911® offers the solution.

Our tactical Chargeback Representment approach relies on a proprietary combination of machine learning and human oversight. The result: individualized, expertly-reviewed, and compiled cases, promising greater ROI and long-term chargeback reduction plans.

Don’t lose another dollar to a credit card dispute. Click below and get started today.

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