How Do Banks Investigate Disputes?

April 21, 2022 | 10 min read

how do banks investigate disputes

How Do Banks Investigate Disputes? Let’s Look at the Bank Investigation Process & Find Out.

If a cardholder has a problem with a transaction, and they’re unable to resolve the problem directly with the merchant, they have the option to contact the bank and dispute the charge. You’re probably already aware of that fact. What you may not fully understand, though, is how the bank determines liability for that dispute.

How, exactly, do issuers decide which party is at fault…and who has to pay? How do banks investigate disputes?

Today, let’s examine this question. We’ll explore the process used by bank investigation departments, what evidence they consider, and how long the investigation should take.

What are the Steps of the Dispute Investigation Process?

The process begins when a cardholder contacts their bank. The buyer may claim that the transaction in question was unauthorized, or that it didn’t reflect what the seller promised at the time of purchase.

The card-issuing bank is expected to examine the details of each dispute and make a fair, impartial judgment to determine liability. The card networks have extensive and complex guidelines for this, and these rules determine how banks investigate disputes for the relevant card brand.

In very general terms, the process as to how do banks investigate chargebacks goes as follows:

The customer makes a complaint regarding a transaction

The buyer might claim that the merchandise never arrived, or that it didn’t live up to expectations. The buyer could also claim the transaction was not authorized.

An investigator examines the claim

A representative from the bank investigation department, trained in fraud detection and chargeback procedures, examines the cardholder’s claim.

The bank gathers evidence about the customer’s claim

The investigator gathers relevant information about the transaction. With Visa, this can be done automatically through Visa Resolve Online. Mastercard has similar processes for automatic data retrieval.

The investigator examines the transaction based on the customer’s claim

The investigator reviews the transaction data and evaluates whether the buyer’s claim is reasonable, based on the transaction details available to them.

The investigator makes a decision

The issuer decides to either reject the inquiry, or file a chargeback on the customer’s behalf. If it’s the latter, the bank issues a provisional credit to the cardholder, covering the buyer’s losses, which the bank will later recover from the merchant.

Once you understand the general bank dispute investigation process above, the obvious next question is: how long until a resolution is reached?

How Long Do Bank Dispute Investigations Take?

If fraud is reported or a ‘not authorized’ dispute is lodged, a 10-day period begins in which the bank must complete their investigation. The bank can ask for an extension, but if the investigation takes more than 10 days to perform, they will typically issue the cardholder a provisional refund. In fact, most issuers will automatically offer a temporary credit at the start of an investigation to make their customer happy.

The actual investigation process is just the beginning, though. For instance, if the incident shows signs of a larger, coordinated scheme, the bank may relay the matter to law enforcement or other agencies, especially for interstate offenses..

Even if law enforcement doesn’t get involved, the chargeback process could take weeks, or even months, before it’s finally resolved. It depends on whether the merchant opts to fight back against the dispute claim.

How the Bank Examines the Evidence

Let’s assume a customer contacts their issuing bank and claims that a transaction was unauthorized. Once the bank receives the cardholder’s inquiry, the Federal Trade Commission rules give them 30 days to respond, acknowledging the customer’s claim. In an effort to provide better service to customers, though, banks will generally move quickly on disputes.

The bank initiates a payment fraud investigation, gathering information about the transaction from the cardholder. They review pertinent details, such as whether the charge was a card-present or card-not-present transaction.

The bank also examines whether the charge fits the cardholder’s usual purchasing habits. For instance, investigators will consider whether the cardholder had ever been a customer of the merchant in question before. This information is an integral part of how banks investigate disputes and establish whether the cardholder made a specific purchase.

If the bank determines that the transaction in question was, in fact, a fraudulent charge, they may choose to contact the authorities. At that point, the FBI may decide to get involved if there are signs suggesting a larger pattern, especially one that crosses state lines. In most cases, though, the bank will handle the situation through its internal fraud team.

How Merchants Can Influence the Bank Dispute Investigation Timeline

When a bank issues a chargeback, the merchant will be notified and provided with a reason code explaining their decision. The merchant has a choice here; they can accept the dispute claim, and the resulting losses. Or, if they believe the dispute claim is invalid (a practice called friendly fraud), they can fight back.

The merchant also receives an advice letter from their issuer, or an advice code, detailing the evidence needed if the merchant wishes to fight the claim. They can do this through a process called representment. The merchant literally “re-presents” the transaction to the issuer, along with evidence to support their claim that the transaction was legitimate and should be upheld.

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Specific timelines for merchants to gather evidence and documentation vary, depending on the merchant’s acquiring bank. This article offers more detailed information about chargeback time limits for merchants across different phases of the chargeback process.

After a merchant submits their representment case, there could be three potential outcomes, each impacting the dispute investigation timeline:

Outcome #1

If the issuer finds the merchant’s evidence lacking, the chargeback will stand. The cardholder would then keep the credit, which is made permanent. The merchant will be notified of this decision and is given time to respond.

Outcome #2

If the issuer decides the merchant’s evidence is sufficient to prove the transaction legitimate, the chargeback will be reversed. The funds will be returned to the merchant (minus nonrefundable chargeback fees), and the provisional credit may be removed from the cardholder’s account.

Outcome #3

If the merchant successfully refutes the case, but another claim is presented by the cardholder that shows additional evidence, a “second chargeback” may occur. The bank files a second chargeback based on new information from the cardholder or because of a change to the chargeback code.

What Does the Bank Do in Cases of Fraud?

In fraud cases, the cardholder’s liability is limited by law to $50 for a credit card transaction. For a debit card, the fraud liability is $500 if reported within 60 days. Of course, many banks offer “zero-liability” cards to cardholders, meaning the bank protects the cardholder from any loss.

The bank will advise the customer to immediately contact the three credit reporting bureaus (Equifax, Experian, and TransUnion) with a fraud case. The cardholder can request an immediate credit freeze, which will prevent potential damage to the customer’s credit rating.

The bank wants to move fast. But, like we discussed above, it can take several additional weeks to fully investigate the charge if the merchant provides evidence that the dispute is a case of friendly fraud.

If the merchant submits a representment, the bank must repeat its investigation, taking additional evidence into account. While all this is happening, the money is still tied up. Neither the merchant, the bank, nor the cardholder has access to the funds.

All totaled, it’s not uncommon for the chargeback process to take more than a month—or even several months—to finally resolve.

What Merchant Evidence Will the Bank Consider?

If a merchant can supply the issuing bank with compelling evidence to prove that the disputed transaction was legitimate, the bank may overturn the chargeback. What makes that evidence ‘compelling’ is whether or not it disproves the cardholder’s claim via factual, tangible proof.

Common examples of merchant evidence accepted for bank dispute investigations include:

How Do Banks Investigate Disputes?

Providing any proof of purchase (sales receipts, etc.)

How Do Banks Investigate Disputes?

Shipping, tracking, and delivery information/confirmation

How Do Banks Investigate Disputes?

Conversation logs or other communication conducted with the cardholder

How Do Banks Investigate Disputes?

Evidence: photographs, screenshots, etc., to prove the transaction was legitimate

After Investigation: Is the Bank’s Decision Final?

Even after representment, the cardholder also has a second chance to review the matter and decide whether or not to proceed with further action. So, how do banks investigate disputes that come after a dispute?

The cardholder may accept the bank’s decision or file a secondary dispute called a second presentment, chargeback arbitration, or pre-arbitration chargeback, depending on the card scheme in question. Basically, if the cardholder can provide further evidence rebuking the merchant’s legitimacy claim… the bank will remove the funds from the merchant’s account once more and ask them to decide: accept the chargeback or proceed to arbitration.

During arbitration, the issuing and acquiring banks step out of the matter altogether, allowing the card network to mediate on their behalf. As a ‘neutral’ third-party, the card network will weigh the evidence on both sides of the case, then make a final decision… and by final, we mean final. There is no third chance to rectify a faulty transaction past the arbitration stage.

Resolving Disputes Outside the Chargeback Process

The chargeback process is an essential and helpful consumer protection tool. However, it’s in the interest of all parties—merchants, banks, and cardholders—to avoid chargebacks whenever possible.

Before asking "how do banks investigate disputes," the most important thing to remember is that cardholders must contact the merchant before the bank. Many neglect to do this, however.

It’s best for everyone if the cardholder directly contacts the merchant before filing a chargeback. In many cases, the merchant is willing to work with the cardholder to resolve the situation and avoid a dispute. This is a “win-win” scenario for all parties: the cardholder could see faster resolution while the merchant and issuer are spared the cost of the dispute process.

Have additional questions about the dispute process or how banks investigate chargebacks? Want to learn how merchants and banks can save money through chargeback management? Click below to speak with one of our dispute experts today.

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