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How Banks Investigate Disputes

Exploring the Rules & Processes That Determine How Banks Investigate Disputes

Most online merchants are probably familiar with payment disputes (commonly known as chargebacks). They know that the bank takes their money based on a cardholder complaint. What merchants and cardholders may not know, however, is how banks investigate disputes.

How do issuers decide which party is at fault, and who pays? Let’s examine this question, and also explore why it’s best to prevent disputes from happening when possible.

The Chargeback Process for Banks

We tend to think of credit and debit cards as a fast, painless payment method. With customers conducting billions of transactions around the globe each day, though, it’s no surprise that a small minority of transactions will cause problems.

Merchants want their chargeback rate to stay as low as possible, but some incidents will unavoidably slip through. The rate at which customers file chargebacks can vary widely based on factors including product vertical, sales channel, location, and the card brand, just to name a few. As a rule of thumb, though, the average merchant will have a chargeback ratio somewhere around 0.5% of transactions. This is below the chargeback thresholds established by Visa and Mastercard.

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 goes as follows:

  • The customer makes a complaint regarding a transaction: The buyer might claim that the merchandise never arrived, or didn’t live up to expectations. The buyer could also claim the transaction was not authorized.
  • The bank gathers evidence pertaining to the customer’s claim: The bank examines relevant information about the transaction to determine fault. With Visa, this can be done automatically via the Visa Merchant Purchase Inquiry plugin.
  • The bank examines the transaction based on the customer’s claim: The bank is responsible for reviewing the transaction data and evaluating whether the buyer’s claim is reasonable.
  • The bank makes a decision: The issuer decides to either reject the inquiry or file a chargeback on the customer’s behalf.

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Examining the Evidence

To illustrate this process, let’s assume a customer contacts his or her issuing bank and claims that a transaction was unauthorized. Once the bank receives the cardholder’s inquiry, 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 card fraud investigation, gathering details about the transaction from the cardholder. They review pertinent details, such as whether the charge in question was a card-present or card-not-present transaction.

The bank also examines whether the charge fits into 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 important 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 US Federal Bureau of Investigation (FBI) may choose 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 themselves, through their internal fraud team.

What Does the Bank Do in Cases of Fraud?

In cases of fraud, 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 choose to offer “zero-liability” cards to cardholders, meaning the bank protects the cardholder from any loss.

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

While the bank wants to move fast, it can take up to 90 days to investigate the charge and complete an initial chargeback. Depending on the final decision, the bank will overturn the transaction, clawing the funds back from the merchant’s account. While this is happening, the money is tied up; neither the merchant, the bank, nor the cardholder has access to the funds.

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Of course, the process can take even longer if the merchant decides to fight the dispute. This is 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.

With representment, the bank must repeat their investigation, taking additional evidence into account. All totaled, it’s not uncommon for the chargeback process to take six months or more to resolve.

Resolving Disputes Outside the Chargeback Process

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

Merchants

Merchants

Lose revenue and merchandise and pay added fees and penalties. They see higher operating costs and may lose the ability to process card payments in the long term.

Banks

Banks

Face higher operating costs as they’re forced to devote more resources to investigating disputes. This can slow down other profit-generating departments within the organization.

Cardholders'

Cardholders'

Money is tied up for weeks or months due to the chargeback process. They will be unable to access their funds during this time, which could cause hardships.

According to card scheme rules for how banks investigate disputes, cardholders are required to 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? 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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