banks investigate disputes

How Do Banks Investigate Disputes? A Merchant’s Guide to the Bank Investigation Process

Fraud has become a more increasingly common issue for both consumers and merchants. The Federal Trade Commission revealed that they received 2.8 million fraud reports from consumers in 2021, totaling more than $5.8 billion. With so many reports every year, banks have to follow strict procedures in order to quickly and efficiently handle the report volume. In general, this tends to benefit consumers more than merchants, as the regulations surrounding dispute processes were written with the former in mind.

Because of this, it’s important that merchants understand the process followed by banks to investigate fraud claims, how they can dispute them, and the options they have if the bank decides that the claim is valid.

In this article, you’ll learn how banks handle fraud claims, the different types of fraud that exist, and the options that merchants have to dispute these claims. 

How Do Banks Handle Fraud Claims?

First, the bank will attempt to determine if there is fraud. If the transaction is determined to be fraudulent, they will ask the cardholder for additional information.

A cardholder who has been duped by fraudsters may find this a daunting task as, in many cases, by the time they discover fraud on their account it has been happening for a while.

That’s because fraudsters tend to make small, easily-overlooked purchases before making a large payout.

Under the Fair Credit Billing Act, a cardholder is only liable for $50 in credit card fraud. While researching and verifying each of these transactions to satisfy the bank can be time-consuming, it is often worth it. So long as the fraud claim is validated, the cardholder will not be liable for more than the specified amount. In order to protect their customers from fraud, several banks stipulate in their rules that customers are not responsible for any amount.

In terms of debit card fraud, the Electronic Fund Transfer Act mandates that cardholders alert banks within 60 days of a fraudulent charge; if the cardholder fails to do so, the bank is not obligated to respond. Furthermore, cardholder liability for fraudulent transactions is limited to $50 only if the bank is alerted within two days of the transaction. However, most banks offer consumers 120 days to dispute a fraudulent charge, and they have more lenient liability rules than is legally required.

Once the bank receives notification, it has 10 working days to investigate and decide whether to pay the claim. Upon determining fraud really occurred, they are required to return the money to the cardholder.

While banks can take up to 45 days to investigate, they must temporarily return the funds to the cardholder’s account within the 10-day period. Numerous banks expedite this procedure by issuing a provisional credit as soon as a dispute is submitted.

What Are the Different Types of Fraud?

A dispute occurs when a cardholder asks their bank for a chargeback on a transaction, stating that they either did not authorize the transaction or did not receive the goods or services for which they paid. True fraud accounts for the majority of legitimate claims.

If the client does not receive what they paid for, they must contact the merchant before disputing the charge, which will typically result in the merchant issuing a refund or other remedy. The customer may register a dispute if the seller refuses to reimburse an undeliverable or defective purchase in rare instances.

In instances of genuine fraud, both the cardholder and the merchant may be deemed victims. While it is the cardholder’s information that was stolen and fraudulently utilized, the retailer will be responsible for the resulting costs. In instances of friendly fraud, the customer really defrauds the merchant.

These sorts of fraud can be further subdivided into categories such as credit card fraud and account takeover. 

True Fraud

Authentic fraud occurs when unauthorized charges are made using a lost or stolen credit or debit card. Therefore, the cardholder rejects the purchase, resulting in a new card and account number being issued along with the cancellation of the card.

Examples of Real Fraud:

  • Card loss or theft: When the card is used by a fraudster before the cardholder realizes it has been stolen, typically in instances where the PIN is not required, such as internet purchases.
  • Cards that are forged: When the magnetic stripe of the credit card is copied or if the fraudster has access to the card’s information.
  • Card not present (CNP): The criminal obtains the card information and uses it in instances when the physical card is not necessary.
  • Using a false or disabled card, the fraudster attempts to persuade the merchant to manually enter the information, which will later reveal that the transaction was declined.

Friendly Fraud

Friendly fraud refers to a circumstance in which a cardholder unwittingly commits fraud by disputing a purchase they really authorized. This is typically the consequence of confusion or misunderstanding on the part of the cardholder, who believes they have been charged for a transaction they did not authorize.

Examples of common friendly fraud:

  • The cardholder just forgot or is unaware of the transaction.
  • The cardholder failed to remember a recurring charge.
  • A family member of the cardholder made an unidentified purchase.

Chargeback Fraud

Chargeback fraud is similar to friendly fraud, except the disagreement is purposeful despite the cardholder’s knowledge that they approved the transaction and received the product or service. Chargeback fraud occurs when a cardholder falsifies their dispute in order to keep the purchase and receive a return for the transaction amount.

Examples of Chargeback Fraud:

  • The cardholder returns the item after experiencing “buyer’s remorse.”
  • The cardholder disputes the purchase after the return deadline has passed.
  • The cardholder rejects the transaction because they do not wish to pay the bill.

What is the Bank’s Process for Fraud Claim Investigations?

Typically, bank investigators will examine transaction data for probable fraud indicators. The cardholder’s involvement in a transaction can be established using time stamps, location information, IP addresses, and other elements.

The bank may require additional information from a cardholder alleging that the merchant committed fraud against them. Merchants should be ready to answer these questions at any given time, as an inquiry that is satisfactorily handled will prevent a chargeback.

Investigators should be able to detect friendly fraud when it occurs, as they are trained to recognize circumstances such as expired free trials, unsupervised children making in-app purchases, etc. However, this is not always the case. Chargebacks resulting from friendly fraud are a major problem for merchants, who must prove their innocence in order to avoid chargebacks.

In the event that the bank is certain that fraud has occurred and considers the case to be significant enough, it may alert law enforcement agencies such as the FBI. Law enforcement agencies are the ones who decide whether to conduct investigations.

How Does the Fraud Investigation Process Work?

A cardholder begins the procedure by contacting their bank. It is possible that the buyer will claim that the disputed transaction was unauthorized or does not reflect what the seller promised.

A card-issuing bank must analyze each dispute and determine culpability in a fair and unbiased manner. The card networks have detailed and intricate guidelines for this, and these rules dictate how banks evaluate card brand-specific disputes.

How banks investigate chargebacks, in broad terms, is outlined below:

  1. A consumer files a complaint. They may argue that the goods did not arrive or did not meet their expectations. In addition, they might argue that the transaction was illegal.
  2. A professional employee from the bank’s investigation department evaluates the cardholder’s claim.
  3. Information on the transaction is collected by the bank’s investigator. Visa has their resolve online process that makes this as easy as possible. MasterCard uses similar techniques to retrieve data automatically.
  4. Based on the available transaction information, the investigator analyzes the claim data and determines whether the buyer’s claim is reasonable.
  5. Lastly, the investigator determines if the issuer will reject the inquiry or initiate a chargeback on behalf of the customer. A provisional credit will be granted to the cardholder, which the bank will later collect from the merchant, if the latter is the case.

How Does the Bank Examine the Evidence?

Imagine a consumer contacts their issuing bank to report an unlawful transaction. The Federal Trade Commission stipulates that the bank has 30 days to acknowledge the cardholder’s claim after receiving the enquiry. In an effort to provide better customer service, banks will typically resolve conflicts fast.

The bank launches an investigation into payment fraud by requesting transaction details from the cardholder. They examine crucial information, such as whether the transaction was card-present or card-not-present.

The bank also considers if the charge is consistent with the cardholder’s typical spending habits. For instance, investigators would investigate whether the cardholder has previously patronized the merchant in question. This information is a crucial component of how banks examine disputes and determine if a cardholder made a certain purchase.

If the bank determines that the transaction in question was fraudulent, they may alert the police. The FBI may then decide to intervene if there are indications of a bigger trend, particularly one that transcends state lines. In most circumstances, however, the bank’s internal fraud unit will address the problem.

What’s the Timeframe for Bank Dispute Investigations?

The bank has 10 days to complete its investigation if fraud is reported or if a “not permitted” dispute is filed. Banks may request an extension, but if the investigation takes longer than 10 days, they will normally provide a provisional refund to the cardholder. As a general rule, the majority of issuers will automatically grant a temporary credit at the beginning of an investigation in order to keep the consumer happy.

The real investigation process begins only at that point. If the incident indicates a wider, coordinated plot, the bank may notify law enforcement or other agencies, especially in cross-border criminal cases.

The chargeback process may take weeks or months to settle even if police are not involved. Whether the merchant contests the dispute claim will determine the outcome.

What Does the Bank Do in Cases of Actual Fraud?

The law limits the cardholder’s responsibility for fraudulent credit card transactions to $50. The responsibility for debit card fraud is $500 if notified within 60 days. Many banks provide “zero-liability” cards, which shield cardholders from any loss.

The bank will advise the customer to call the three credit reporting agencies (Equifax, Experian, and TransUnion) immediately in the event of fraud. The cardholder can request an instant credit freeze, which will protect the customer’s credit rating from potential harm.

While banks prefer swift action, if the merchant presents evidence that the disagreement is a case of friendly fraud, it may take many more weeks to complete the investigation.

If the merchant goes through a representment process, the bank must repeat its examination while taking into account any further information. While all of this is occurring, the funds are still being held. This means that the money is unavailable to the business, the cardholder, and the bank.

It’s not uncommon for the chargeback procedure to take more than a month, or even several months, to conclude.

When a fraudulent transaction is discovered during the standard chargeback procedure, the issuing bank promptly issues a provisional credit to the customer’s account.

When a merchant receives a friendly fraud chargeback, the situation becomes somewhat more complicated. This form of fraud is more difficult to prove, and banks typically side with the customer in such cases. Even in the best-case situation, it will take time to recover monies lost via friendly fraud.

If the merchant can demonstrate to the card-issuing bank that the transaction was valid and that the cardholder’s assertions are untrue, the merchant can recover the funds. Nonetheless, this procedure often takes at least 30 days, and frequently longer.

The issuing bank is responsible for determining which claims to accept. The merchant must offer proof that the bank finds convincing enough to reverse the chargeback in order to win the dispute. Although the bank’s judgment can be contested through arbitration, the associated fees are often in the hundreds of dollars, making it a poor option for the vast majority of merchants.

How Does Fraud Affect Merchants?

Chargebacks are ultimately the responsibility of merchants, so banks are not motivated to investigate fraud thoroughly or fight back strongly against customer accusations. Although this may not be fair, it emphasizes how vital it is for merchants to protect themselves against chargebacks and fraud. Furthermore, federal legislation and card network principles govern the chargeback process, but they do not constitute a coherent, internally consistent system that treats all stakeholders fairly.

This means that chargebacks require a two-front approach. As well as defending themselves and their customers against true fraud, merchants must also fight friendly fraud chargebacks after they’ve been filed by engaging in the representation process and providing the banks with evidence that the customer’s claims were not accurate.

What Can Merchants Do About Disputes?

When a bank makes a chargeback, it will contact the merchant and provide a reason code. The company can accept the dispute claim and the resulting losses or challenge the claim if it is deemed invalid.

Furthermore, the issuer sends the merchant an advisory letter outlining the proof required if the merchant wants to contest the claim. A chargeback representment procedure can be used for this purpose. It is the merchant’s responsibility to re-present the transaction to an issuer, along with proof that the transaction is valid and should be sustained.

The timeframes for merchants to collect evidence and paperwork vary according to their acquiring bank.

There are three possible outcomes after a merchant presents their case, each of which impacts the timing of the dispute investigation:

  1. A chargeback will be upheld if the issuer determines that the merchant’s evidence is insufficient. In that case, the credit would remain with the cardholder. Merchants will be notified of this decision and given an opportunity to respond.
  2. Chargebacks are reversed if the issuer determines that the proof provided by the merchant is sufficient to show that the transaction was legitimate. Upon return of the money to the merchant (less any non-refundable chargeback fees), the provisional credit may be erased from the cardholder’s account.
  3. “A second chargeback” may result if the retailer successfully refutes the claim, but the cardholder provides more evidence in the second claim. In case of updated cardholder information or a change in the chargeback code, the bank initiates a second chargeback.

What Merchant Evidence Will the Bank Consider?

If a merchant can provide convincing evidence that the disputed transaction was valid, the issuing bank may reverse the chargeback. The evidence is deemed “compelling” if it disproves the cardholder’s allegation using factual, concrete evidence.

Examples of commonly accepted merchant evidence in bank dispute investigations include:

  • Providing any purchase documentation (sales receipts, etc.)
  • Shipping, tracking, and confirmation of delivery information
  • Conversation logs and other records of communication with the cardholder
  • Photographs, screenshots, etc., proving the legitimacy of the transaction

Can the Bank’s Decision Be Disputed?

Even after chargeback representment fails, the cardholder gets a second opportunity to assess the situation and determine whether to take additional action. 

Depending on the card processor in question, the cardholder may accept the bank’s judgment or initiate a further dispute known as a second presentment, chargeback arbitration, or pre-arbitration chargeback. Essentially, if the cardholder provides additional information contradicting the merchant’s claim of authenticity, the bank will take the money from the merchant’s account and urge them to accept the chargeback or continue to arbitration.

During arbitration, the issuing and acquiring banks completely withdraw from the dispute, leaving the card network to act as mediator. As a ‘neutral’ third party, the card network will evaluate the facts on both sides of the dispute before rendering a final verdict. There is no third opportunity to correct a flawed transaction following the conclusion of arbitration.

The chargeback procedure is an indispensable and beneficial consumer protection instrument. However, businesses, banks, and cardholders all have an incentive to avoid chargebacks wherever feasible.

The most crucial thing to understand before asking “how do banks investigate disputes?” is that cardholders must contact the merchant prior to contacting the bank. However, many neglect to do so.

It is optimal for all parties if the cardholder contacts the merchant directly before initiating a chargeback. In many instances, the retailer is prepared to collaborate with the cardholder to remedy the issue and prevent a dispute. This is a “win-win” situation for all parties: the cardholder might receive a quicker decision, while the merchant and issuer would be saved the expense of the dispute procedure.

Conclusion

Fraud disputes are an important protection for consumers in a world where fraud seems rampant, but they can represent a significant challenge for merchants when this power is abused. One way that merchants can deal with this situation is by reviewing and understanding the process used by banks to handle disputes.

If your evidence is not sufficient, you can seek additional arbitration. However, this is not often recommended as it can be more trouble than it’s worth.

Ultimately, the best way to deal with disputes is to treat their source. If you are having a lot of trouble with fraud claims, evaluate their nature to find more efficient solutions than a dispute process.

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