What are Transaction Disputes? Why Do Customers Dispute Their Transactions?
Transaction disputes are an increasingly-common obstacle for merchants working in remote channels such as eCommerce. These disputes serve an important function in the payments ecosystem. However, more and more customers are abusing these disputes to claw back funds without a valid reason to do so.
Let’s take a quick look at the transaction dispute process. In this post, we’ll examine when and why this mechanism should be used, as well as how you can stop the next dispute before your customer calls the bank.
What are Transaction Disputes?
First, we should distinguish between a chargeback and a dispute. Most chargebacks begin with a dispute; that said, not all disputes will inevitably lead to a chargeback.
A customer can initiate a transaction dispute by contacting the issuer (the bank associated with the payment card used in the transaction). The cardholder will ask the bank to reverse the charge; the bank examines the circumstances and determines if there is a legitimate reason to do so. If the bank accepts the customer’s claim, then the dispute progresses to a chargeback.
As we alluded to above, chargebacks do have a legitimate and important role in the payments industry. Chargebacks exist to ensure consumer confidence in credit and debit cards. After all, if you know you’re able to recover money you lose to unauthorized use, criminal fraud, or merchant abuse, then you’re going to have much more confidence in the concept of the payment card.
This process works as follows:
The cardholder contacts the issuing bank to challenge a transaction. The issuer reviews the complaint and any available evidence.
The issuer provides a conditional refund to the cardholder.
The issuing bank assigns a numeric reason code for the chargeback, then electronically transmits all the chargeback data to your acquiring bank.
The acquirer reviews the information. If possible, the acquirer may simply resolve the issue; if not, the acquirer forwards the claim to you, and debits the amount of the original transaction, along with any applicable fees, from your account.
You have the option to accept or challenge the customer dispute. Nonrefundable bank chargeback fees apply in either case.
If you disagree with the cardholder’s claim, you can submit a response and supporting evidence to the acquirer. This is called “representment,” because you’re literally re-presenting the transaction to the bank.
The acquiring bank will electronically re-present the chargeback dispute information back to the issuing bank.
The issuing bank will then review the information. The issuer will either rule in your favor and uphold the original sale, or rule in the cardholder’s favor and submit a pre-arbitration.
In the event the issuer submits a pre-arbitration, the merchant may have the option to escalate to the arbitration stage. This will involve the card network, and could be an even more costly and time-consuming process.
Cardholders are Abusing the Dispute Process
It’s true that transaction disputes are a consumer protection tool. The problem arises, though, when cardholders use this tool incorrectly.
You stand to lose sales revenue and merchandise every time a cardholder files a transaction dispute without a valid reason. You also pay additional fees and penalties and see higher overhead costs. In the long run, you could even potentially lose the right to process card transactions altogether.
Even with a best-case scenario—one where you successfully represent the sale—transaction disputes can be a complex, drawn-out process. A dispute can last weeks, or even months, before being settled. All that time, your money is tied up and inaccessible to you or your customer.
Research conducted by Chargebacks911® reveals that only 14% of consumers contact a merchant before filing a chargeback. Another study found that roughly 81% of chargebacks are filed out of convenience—the buyer simply felt a customer dispute with the bank seemed like an easier solution. This is a practice known as friendly fraud.
There’s an incredible amount of money at stake for your and other merchants. Direct losses from chargebacks are expected to surpass $80 billion annually by 2023, and 60-80% of those chargebacks will be cases of friendly fraud.
The Right Strategy to Stop Disputes
Why is friendly fraud such a problem? Why do so many customers abuse transaction disputes? The truth of the matter is that, in most cases, cardholders may not even realize they’re doing anything wrong.
The chargeback process has not kept pace with developments in technology. We’re using a system designed for a pre-internet age. The result is that customers feel free—or even encouraged—to file disputes, without ever needing to come face-to-face with the negative effects of their actions:
- The increased volume of cases makes it difficult for banks to complete the necessary due diligence for each customer dispute. That encourages MORE disputes...and the cycle feeds on itself.
- If there is any legitimacy at all to a customer’s complaint, the case will likely go to the cardholder. Banks are understandably reluctant to jeopardize customers’ trust.
- Card networks often don’t strictly enforce their own regulations or properly sanction those who fail to abide by them.
- Merchants often don’t fight invalid customer disputes, considering them an unavoidable cost of doing business.
- Misinformed customers erroneously equate a chargeback with a refund.
- Customers who successfully file a dispute are more likely to repeat the behavior.
Issuers should only file dispute a transaction in cases of criminal fraud or merchant misconduct. This means the ability to prevent legitimate disputes is in your hands.
The best strategy is to adopt a chargeback mitigation plan that includes both 1) best practices for criminal fraud prevention, and 2) tactics to eliminate errors. Once you’ve weeded out these threats, all remaining chargebacks should be cases of friendly fraud, which you can engage through tactical representment.
There’s no quick or easy solution for preventing transaction disputes. With the right strategies in place, though, you can protect your business—and your bottom line.