How do banks investigate debit card disputes?

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 on 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 these investigations work, what constitutes fraud, and what you can do as a merchant to reduce disputes and chargebacks.

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

• A customer reaches out to their bank because they believe a charge is suspicious or unauthorized. They might also contact their bank due to not receiving products or from inadequate service.
• The customer’s issuing 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 card networks to gather additional details that often prove crucial.
• The investigator reviews all the information available to determine whether the cardholder’s claim is justified.
• The investigator makes a decision and either issues a chargeback to the merchant’s acquiring 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.

Investigation timeline

Once a disputed charge claim is reported, the bank generally has up to 10 days to investigate. Banks can request extensions if the investigation grows more complicated or demands more time. When this occurs, the bank must issue a provisional credit to the customer while the investigation continues.

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, the timeline for completing chargeback investigations can extend up to 45 days and, in certain cases, up to 90 days depending on the nature of the transaction. However, banks typically aim to resolve claims as quickly as possible to maintain good standing with both merchants and customers.

What banks look for

Banks will look over all the information available about the transaction to look for suspicious behavior and telltale signs of fraud, including:

• Card-not-present (CNP): CNP is when someone obtains an individual’s information and uses it to make purchases either online or by phone.
• Application fraud: This is when an individual’s personal information is obtained and then used to apply for cards and make fraudulent purchases.
• Account takeover: Attackers use phishing emails posing as reputable companies to send malicious links or attachments designed to obtain personal information. The account is then used to make unauthorized transactions.
• Debit card theft: This is when a physical debit card is stolen and used to make in-person purchases. It’s the simplest form of 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 merchants the customer had not previously bought from or large amounts outside the customer’s spending range. They’ll also look through their database for similar purchasing patterns in other disputed claims to uncover any broader patterns.

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 rather than when it was first initiated, which could make the charge seem unfamiliar when it appears. Furthermore, products may have arrived late or been misplaced, or the cardholder may have been mistaken about their 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 charge will stand.

What does the bank do in cases of fraud?

• Freeze the account: This is to prevent any additional fraudulent activity and stop any in-process transactions.
• 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 bank and cardholder. Some banks offer zero-liability protection, in which they cover all losses cardholders suffer in the face of fraud. For debit card purchases, liability depends on how quickly the unauthorized transaction is reported, and in some cases cardholders may be liable for up to $500.
• Issue a chargeback: This step can take the longest, as merchants can appeal the bank’s decision and potentially repeat the investigation 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 its decision will be final.

Businesses aren’t left defenseless against chargebacks and disputed transaction claims (check out our article on how to dispute a chargeback).

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 customers to contact them if there are 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 and 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 because they want to do right by their clients (some of whom are merchants and businesses themselves), merchants often bear the brunt of the costs in fees, lost service and reputational harm when fraud is determined.

But as stated earlier, merchants are not defenseless. They can appeal the bank’s decisions, offer new evidence and, in some cases, escalate the dispute through the card network’s arbitration process. 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 focused on other business decisions.