A man taking credit card payment on a handheld device.

How do banks investigate disputes on debit cards

Saturday, December 05, 2015

Any business that accepts electronic payments has most likely gone through the experience of a customer disputing a transaction. This process involves both the merchant and customer, along with the customer’s card issuing bank.

In the worst scenario for merchants, after the cardholder’s bank investigates the transaction, a “chargeback” is issued, in which the merchant is required to make good the customer’s loss. In the best scenario, a dispute is resolved either by the transaction being deemed authentic or the customer withdrawing their dispute.

But a disputed transaction is a frustrating experience for all participants in the payment process. One of the members will have to cover the suspicious charge, so merchants and consumers alike are naturally curious about how banks investigate contested charges and what they can do on their end.

Because fraud is often used as a catch-all term, and because exactly how banks go about investigating disputed charges is not always clear to merchants, this article will focus on breaking down how exactly these investigations work, what constitutes fraud, and what you can do as a merchant to reduce disputes and chargebacks.

The chargeback process for banks (what they investigate)

Here is a summary of a disputed charge investigation from start to end:

  • A customer reaches out to their bank due to believing a charge is suspicious or unauthorized by them. They might also contact their bank due to not receiving products or from inadequate service.
  • The customer’s bank then receives the claim and assigns it to a member of their investigation department. This member will represent the bank and is trained in chargeback procedures and uncovering fraudulent behavior.
  • The investigator works alongside the merchant and the customer to gather all evidence and information about the charge. They’ll also work with the credit card networks to gather additional details that often prove crucial.
  • The investigator reviews all the information available to determine whether or not the cardholder’s claim is justified.
  • The investigator makes a decision and either issues a chargeback to the merchant’s issuing bank or determines the charge is authentic and no chargeback is required.
  • If a chargeback is issued, the customer’s bank will then offer a provisional credit to the buyer to reverse the fraudulent charge. They’ll then charge the merchant this credit amount to compensate for their loss.

10-day deadline: Once a disputed charge claim is reported, the bank has ten days to finish its investigation. Banks can request extensions if the investigation grows more complicated or demands more time. When this occurs, banks will often send out a provisional credit to the customer to ease tensions as the investigation ensues (this typically occurs only for credit card charge disputes).

There are multiple reasons an investigation can last longer than ten days:

  • The merchant may choose to appeal the bank’s decision.
  • Law enforcement may get involved.
  • The bank may have to further the investigation and work with other agencies if there appear to be signs of a larger scam taking place or a systematic scheme.

In reality, issuing banks are given 30 days to complete chargeback investigations by the Federal Trade Commission once they’ve received a disputed claim. But it’s in the bank's best interest to resolve claims as soon as possible to keep good standing with both merchants and consumers, hence, the 10-day deadline.

Assessing the evidence: Banks will look over all the information available about the transaction to look for suspicious behavior and tell-tale signs of the following scams:

Card-not-present: Card-not-present (CNP) is when someone obtains an individual’s information and uses it to make purchases either online or by phone.

Credit card application fraud: This is when an individual’s personal information is obtained and then used to apply for cards to make fraudulent purchases.

Account takeover: Also known as phishing, attackers use emails posing as reputable companies to send malicious links or attachments that perform various functions, including obtaining personal information. The account is then used to make unauthorized transactions.

Card theft: This is when physical credit or debit cards are stolen and then used to make in-person purchases. This is the simplest form of credit card fraud and the type most preventable by merchants.

Banks will also look for purchases made outside a cardholder’s typical buying habits. This can look like what appears to be “random” purchases with merchant’s the customer had previously never bought from or large amounts outside the customer’s spending range. They’ll also look through their database to find any similar purchasing patterns with other disputed claims to uncover any broader patterns.

What does the bank do if it determines no fraud was committed?

It’s common for cardholders to contact their banks midway through an investigation and remove their claim.

They may suddenly recognize the purchase or remember some additional pertinent details (for example, they may remember that a merchant was going to charge them for a service once it was completed and not when it was first initiated, making the customer not recognize the charge once it’s applied). Furthermore, products may arrive late, been misplaced, or they may have been mistaken about the quality of its condition, prompting the cardholder to remove their claim.

Or, the bank may determine that there was not enough evidence of fraud to issue a chargeback. Either way, in this event, the cardholder and the bank will then just let the charge stand.

What does the bank do in cases of fraud?

Once fraud has been uncovered, the bank will promptly:

  1. Have the account frozen: This is to counter any additional fraud planned and end any in-process transactions. Banks will also recommend that cardholders reach out to their credit union to freeze their credit account and report the fraudulent behavior, as to not affect their credit score.
  2. Collect any liability charges from the cardholder: The exact amount that the cardholder will be held liable for depends on the type of card and any agreements between the band and cardholder. Some banks offer “zero-liability” cards, in which banks will cover all losses cardholder’s suffer in the face of fraud. The liability prices regulated by law are up to $50 for credit card transactions and up to $500 for debit card purchases.
  3. Issue a chargeback: This step can take the longest, as merchants can appeal the bank’s decision and potentially have the investigation repeat and introduce new evidence (this is known as representment). Regardless, a chargeback will eventually be issued. And in the event of a standstill, the card network will work as a mediator between the bank and the merchant and their decision will be final.

What can businesses do?

Businesses aren’t left defenseless against chargebacks and disputed transaction claims (check out our article: What to do if you suspect credit or debit card fraud by a customer).

The connection between fraud prevention and customer service: Customers are supposed to, but often don’t, contact merchants about suspicious purchases before contacting their banks. Every business should consider reminding their customers to contact them if there’s any problems, questions, or payment issues. They can do this during the payment process, whether online or offline, or through paper receipts or online order/payment confirmations.

Entirely avoiding the chargeback investigation process is beneficial for the merchant, the customer and the investigating bank. Merchants not only can avoid chargeback fees but can also use the opportunity to strengthen trust with their clients. Customers will have their disputes resolved faster and in a more personal way, and it’s common for customers to prefer the business even more after feeling heard and cared for.

Why merchants bear the costs of fraud: Merchants can often feel that they are given the worst end of the dispute process. While banks have an incentive to go about the process fairly due to wanting to do right to their clients (some of which are often merchants and businesses themselves), it is the case that in the event fraud is determined, merchant’s often pay the brunt of the costs in fees, lost service, and hurt reputation.

But as stated earlier, merchants are not defenseless. They can appeal the bank’s decisions, offer new evidence and even reach out to a third party arbiter to settle the investigation. But, the best plan of action is a preemptive one, with businesses encouraging their customers to go to them first in the face of suspicious behavior or inadequate service.

Merchants can also take advantage of anti-fraud tools offered by their payment processor. In the face of a dispute or a suspicious purchase, having a team of experts on your side available to assist your business is a must have to reduce chargebacks and keep you focusing on other business decisions.

Interested in working with a payment processor who can help you prevent and work through payment disputes?

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at heartland.us.