In the world of payment processing, there are few words more nerve-wracking than “chargeback.” All business owners know how damaging these payment reversals can be. However, one precursor to chargebacks that businesses are usually less familiar with is provisional credits.
Provisional credits are a simple tool for banks to help customers deal with transaction delays or disputes. Still, their effects are far more wide-reaching than their seemingly friendly name might imply.
It’s important that business owners understand the nature of these credits, how they work, and what they can do about them.
This article will discuss what provisional credit is, how they work, and what merchants can do to dispute them.
What Are Provisional Credits? And How Do They Work?
Provisional credits are a tool used by banks to deal with delayed transactions and customer disputes. At their core, they are a temporary credit given to a customer by the bank if a transaction takes longer than normal to process or while they investigate a claim. Once the transaction has gone through, or if their investigation finds the charge valid, the credit is reversed. However, the credit is made permanent if the charge is found invalid.
These credits show up on card statements as provisional credit or just credit. While they don’t always include details as to why the credit was issued, the cardholder can simply contact their bank to get the full details.
While they might sound relatively benign from the cardholder’s perspective, they can significantly harm businesses because the funds credited to the cardholder are taken from the merchant’s acquirer account.
Provisional credits are only one part of the dispute process, with the other being chargebacks. Chargebacks are payment reversals performed at the banking level and have associated fees and other problems.
The provisional credit process
While provisional credits can be issued for various reasons, they always follow the same overall process, which starts with the client’s claim and ends with the results of the bank’s investigation. Here is a look at this process step by step:
- The cardholder files a fraudulent or unauthorized charge claim with their bank.
- The bank debits the merchant’s acquirer’s bank account for the cost of the charge (who passes this charge to the merchant and traditionally issues a fee).
- The bank issues a temporary credit to the customer while filing a chargeback.
- The bank starts an investigation into the customer’s claim.
- After the investigation has concluded, the bank either reverses the credit and returns the funds to the merchant or makes it permanent, depending on their findings.
What Are the Most Common Reasons for Provisional Credits?
Provisional credits can be issued for several reasons, such as fraud or errors with the transaction. They can also be issued for transactions that take longer than normal to verify, in which case the credit is simply a placeholder while the transaction goes through.
Except for provisional credits for delayed transactions, the most common reasons for these are problematic for merchants. That’s due to their association with disputes, which leads to chargebacks.
While a customer could attempt to file a dispute for any number of reasons, only a few of them are considered legitimate when it comes to provisional credits. Some examples include:
- The amount of the transaction was higher than what the customer agreed to.
- The customer was charged for a subscription after having canceled their service.
- There was an error in the transaction process.
- The customer didn’t authorize the transaction.
- The customer didn’t receive the goods or services.
The list above includes some common reasons most banks have, if not all, for provisional credits and disputes. However, different card networks such as Visa and Mastercard have codes and reasons for chargebacks that come from these credits.
What Are the Effects of Provisional Credits on Merchants?
Provisional credits represent a real pain point for merchants because of the subtracted funds and the ramifications that can come from them.
The first problem is subtracting the funds. The bank takes the funds for a provisional credit from the acquirer bank, and they, in turn, take it from the merchant’s bank account, leading to the second problem, chargeback fees.
The acquirer bank hits the merchant with a chargeback fee to cover the costs of the process. Alone, a chargeback fee is rarely more than a nuisance, but recurring fees can have catastrophic consequences.
Card brands and banks have specific thresholds for what they consider to be an acceptable chargeback rate, which is the ratio of chargebacks a merchant receives against their total number of transactions. The specific percent for the threshold varies from network to network and bank to bank, as well as the consequences for exceeding it. Additional fee holds, monitoring programs, fines, and account termination are potential outcomes of receiving multiple chargebacks.
Even setting aside the significant issue of chargebacks, merchants still have to deal with losses from shipping fees and any merchandise they have already sent out.
What Can Merchants Do About Provisional Credits?
As their name implies, provisional credits are not necessarily permanent, and the merchant has ways to dispute the customer’s initial claim.
When a customer files a claim, the merchant is allowed to dispute through a process called chargeback representment. Through this process, the merchant provides the bank with evidence supporting the charge’s validity.
Examples of such evidence include:
- Sale or delivery confirmation receipts
- Pictures
- Contracts
- Tracking information
The merchant must make sure that the evidence they are supporting is relevant to the customer’s specific claim, for which they should refer to the chargeback reason code. You must also be aware of the time limits for representment and include a rebuttal letter that supports and outlines your case.
However, it’s important to clarify that this process doesn’t guarantee that the merchant will receive the funds back. In most cases, the credit is made permanent.
Conclusion
Provisional credits are a useful tool for banks to deal with disputes while retaining customer satisfaction, but they place the burden of the problem on the merchant. They not only lead to revenue loss, but the threat of chargebacks can cause additional fees and even close your account. While there is a dispute process for merchants, the harsh truth is that the credit will be permanent in most cases. As such, merchants should do their best to fight these credits at their source, ensuring that all transactions are legit and that the customer is satisfied with their services.
