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The process banks use to evaluate and investigate claims of fraud can be obtuse and frustrating, both for cardholders and for merchants. For cardholders who've fallen victim to credit card fraud, it can seem like the bank is taking forever to actually close the investigation, even when the fraud seems completely obvious. For merchants, the number of highly dubious fraud claims that result in chargebacks can make them wonder if the bank actually investigates claims of fraud at all.
Some of the basic rules for investigating fraud are established by the major card networks, but individual banks have a lot of leeway when it comes to actually carrying out the process. Fortunately, banks have their own incentives to fight fraud, and there are some standard procedures for them to follow. When banks receive claims of credit card fraud, what do they actually do to investigate them?
- What Are the Different Types of Fraud?
- What Happens When a Bank Gets a Fraud Claim?
- How Do Banks Investigate Fraud?
- How Do Fraud Victims Get Their Money Back?
- Why Do Merchants Bear the Costs of Fraud?
- How Long Does a Bank Fraud Investigation Take?
- Do Banks Press Charges for Fraud?
- Do Banks Really Investigate Disputes?
Banks, customers, and merchants don’t always speak the same language when fraud is the subject of discussion. For customers, fraud can be a catch-all term that refers to a wide range of complaints or issues they may have with transactions, many of which might not fall under the legal definition of fraud. In the realm of merchant chargebacks, we talk about “true fraud” and “friendly fraud,” two very different things that aren’t as closely related as their names might suggest.
Untangling the many varieties of fraud can get complicated, especially when merchants are trying to make sense of their chargeback data for analytical purposes. It can be helpful to know how fraud claims are handled on the bank’s end, what sort of timeline to expect, and what actions they are likely to take.
What Are the Different Types of Fraud?
- True fraud is when a third party uses stolen credit card information to make an unauthorized transaction.
- Friendly fraud, also known as chargeback fraudor first-party misuse, is when a cardholder makes false or misleading dispute claims in order to obtain a chargeback.
A dispute is when a cardholder asks their bank for a chargeback on a transaction, claiming that they either didn't authorize the transaction or didn’t get what they paid for. True fraud is the most common reason behind legitimate disputes.
If the customer didn’t get what they paid for, they’re required to contact the merchant before disputing the charge, which will usually result in the merchant providing a refund or some other remedy. When a merchant refuses to provide a refund in accordance with their sales agreement, or violates card network rules when processing a transaction, the customer has a valid claim tofile a dispute.
In cases of true fraud, both a cardholder and the merchant can be considered victims. The cardholder was the one whose information was stolen and used illegally, while the merchant will be the one bearing the cost. In cases of friendly fraud, however, the customer is actually defrauding the merchant.
True fraud can result from simple transactions involving the use of stolen card information, or may involve account takeover attacks that utilize stored payment credentials in the customer’s own account. For now, however, let’s focus on the big picture.
What Happens When a Bank Gets a Fraud Claim?
The first thing the bank will do is try to substantiate that fraud has actually occurred. They will ask the cardholder to provide additional details about the transaction and explain why they believe it to be fraudulent.
For cardholders who have been victimized by fraudsters, this can feel like a big ask. Oftentimes when a cardholder first notices fraud on their account, they discover that it’s been going on for quite some time.
Small, easily overlooked card testing purchases often accumulate before the fraudster goes for a big payout.These are low dollar amount transactions that let the fraudster know that the card hasn’t been reported stolen yet.
Researching and documenting all of these transactions to satisfy the bank can be a lot of work, but it’s worth the effort—the Fair Credit Billing Act caps cardholder liability for credit card fraud at $50. As long as the fraud claim can be substantiated, the cardholder won’t be held responsible for more than that amount. Many banks even have policies dictating that the customer won't be held liable for any amount at all when fraud occurs.
Debit card fraud is governed by the Electronic Fund Transfer Act, which requires cardholders to notify banks about fraudulent charges within 60 days of the transaction—any later and the bank is not obligated to respond. In addition, cardholder liability for fraud is only limited to $50 if the bank is notified within two days of the transaction. However, most banks give their customers 120 days to dispute a fraudulent charge and have more generous liability policies than the law requires.
Once notified, the bank has 10 business days to investigate the claim and reach a decision. If they find that fraud did indeed occur, they are obligated to refund the cardholder.
If the bank needs more time to investigate, they can take up to 45 days, but they must at least temporarily return the funds to the cardholder’s account by the 10-day deadline. Many banks streamline this process by granting a provisional credit as soon as a dispute is filed.
How Do Banks Investigate Fraud?
Bank investigators will usually start with the transaction data and look for likely indicators of fraud. Time stamps, location data, IP addresses, and other elements can be used to prove whether or not the cardholder was involved in the transaction.
When the cardholder is claiming that the merchant defrauded them in some way, the bank may request more information. Merchants should always keep detailed purchase records and be on the lookout for these inquiries. If you can provide a response that satisfies the bank, that’s one less friendly fraud chargeback you’ll have to deal with.
Ideally, bank investigators should uncover intentional (and unintentional) friendly fraud when it occurs, since they're trained to identify common scenarios such as:
- The customer let a free trial run into the paid billing period
- An in-app purchase was made by an unsupervised child
- The customer forgot about a recurring subscription charge
- Buyer’s remorse
But as every merchant knows, this doesn’t always happen. Friendly fraud chargebacks are a huge problem for merchants, who have to take it upon themselves to provide evidence that refutes these claims.
If they’re confident that fraud has occurred and feel the case is substantial enough to warrant it, the bank may notify law enforcement agencies such as the FBI. Of course, the decision on whether or not to open an investigation is up to the law enforcement agency involved.
How Do Fraud Victims Get Their Money Back?
When a transaction is disputed as fraudulent, the issuing bank immediately issues a provisional credit to that customer’s account. Once the chargeback process is completed and the funds have been taken back from the merchant account, the provisional credit is made permanent.
When a merchant is hit with a friendly fraud chargeback, things are a little more complicated. This type of fraud is harder to prove, and banks tend to side with the customer when in doubt. Even in the best-case scenario, recovering funds lost to friendly fraud will take some time.
If the merchant can prove to the issuing bank that the transaction is legitimate and the cardholder’s claims are false, they can get their money back. However, this process will generally take at least 30 days, and often longer.
The process for fighting friendly fraud is called chargeback representment. The merchant has to present the transaction to the issuer a second time, along with evidence that refutes the cardholder’s claims.
The evidentiary criteria for each chargeback reason code is determined by the card network, but the issuer is responsible for reviewing it and making a decision. In order to win the dispute, the merchant must provide evidence that the bank finds sufficiently convincing.
While the bank’s decision can be appealed through arbitration, the loser has to pay hundreds of dollars in additional fees. Unless you’re dealing with a high-value transaction and are certain the card network will side with you, it rarely makes sense to carry a dispute that far.
Why Do Merchants Bear the Costs of Fraud?
The rules of the chargeback process are defined by a combination of various federal laws and card network guidelines created over the course of decades—they don’t really add up to a cohesive, internally consistent whole that treats every stakeholder equally.
With merchants carrying the ultimate liability for the cost of chargebacks, banks aren’t really incentivized to investigate fraud in great depth or push back too hard against their customers’ claims. This might not be fair, but it highlights how important it is for merchants to take charge of their own defense when it comes to fraud and chargebacks.
Fighting chargebacks is a battle on two fronts. Not only do merchants have to preemptively defend themselves and their customers against true fraud, but they must also fight friendly fraud chargebacks after they’ve been filed by engaging in the representment process and supplying the banks with compelling evidence that proves they were wrong to take their customer’s claims at face value.
FAQ
How Long Does a Bank Fraud Investigation Take?
Typically bank fraud investigations take up to 45 days.
Do Banks Press Charges for Fraud?
Yes. Fraud charges of sufficient scale can result in state or federal charges and time in jail.
Do Banks Really Investigate Disputes?
Yes. They do so as a protection service for their customers so that they don’t have to worry about the ever-increasing sophistication of fraud.
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FAQs
How Do Banks Investigate Fraud? Bank investigators will usually start with the transaction data and look for likely indicators of fraud. Time stamps, location data, IP addresses, and other elements can be used to prove whether or not the cardholder was involved in the transaction.
How do banks do fraud detection? ›
Machine learning uses huge sets of data to identify suspicious patterns. Predictive analytics, product recommendations, market research, and more are combined together with multifactor authentication (MFA), messaging, and other telecom monitoring tools to alert both banks and customers to fraudulent activity.
Do banks refund Unauthorised transactions? ›
Your bank can only refuse to refund an unauthorised payment if: it can prove you authorised the payment. it can prove you acted fraudulently. it can prove you deliberately, or with 'gross negligence', failed to protect the details of your card, PIN or password in a way that allowed the payment.
Can bank reverse a transaction if scammed? ›
If you've bought something from a scammer
Your card provider can ask the seller's bank to refund the money. This is known as the 'chargeback scheme'. If you paid by debit card, you can use chargeback however much you paid.
What happens when you report a transaction as fraud? ›
What usually happens in the end? Once you report fraudulent charges and provide any necessary documentation, the bank has 30 days to respond to your issue and begin an investigation. From there, the bank has to complete the investigation within 90 days.
How often does bank fraud get caught? ›
It really depends on the actions taken by a cardholder after they notice a possible attack and the prevention methods a bank or card issuer takes to detect fraud. Some estimates say less than 1% of credit card fraud is actually caught, while others say it could be higher but is impossible to know.
How is fraud usually detected? ›
Fraud detection generally involves data analysis-based techniques. These techniques are broadly categorized as statistical data analysis techniques and artificial intelligence or AI-based techniques.
Can banks find out who used your card? ›
No, the bank cannot determine who used your debit card directly. However, if you tell the bank that you believe someone has used your card without your permission, they may be able to investigate and provide you with some information about the transaction.
What does it mean when your bank account is under investigation? ›
Why is my bank investigating my account? The reasons why a bank might investigate your account can vary. For consumers, it may be because they detected suspicious activity. For merchants, the most common reason is either to address suspicion of money laundering, or due to chargebacks.
What happens when a bank flags your account? ›
A bank account freeze means you can't take or transfer money out of the account. Bank accounts are typically frozen for suspected illegal activity, a creditor seeking payment, or by government request. A frozen account may also be a sign that you've been a victim of identity theft.
The responsibility for banking fraud lies with both the bank and the customer. Banks are responsible for ensuring the security of customers' financial data and accounts. They should have strong security systems and protocols in place to protect customers' accounts from fraud and theft.
What are the chances of getting money back after being scammed? ›
Advocate, Supreme Court of India, Dr Pavan Duggal, said that victims losing money to bank frauds can get 90% of their money back in just 10 days. Most banks have an insurance policy against unauthorized transactions. Bank customers have to report an unauthorized transaction within three days to get up to full refund.
How long do bank fraud investigations take? ›
In the US, banks are required to complete fraud investigations within 10 business days of the time they are advised of the claim. Banks can request an extension, but in most cases, they will be required to issue a temporary refund to the customer within 10 days.
What triggers a suspicious transaction report? ›
Generally speaking, however, banks and other financial institutions must report unusual or suspicious transactions. These include large cash deposits or transfers inconsistent with customer activity and transactions involving known criminals or terrorist groups.
Does reporting fraud get your money back? ›
Sometimes banks will refund the total amount of fraudulent charges even if they're not legally required. But, if enough time elapses between the charge and the fraud report, a bank might refuse to reimburse some of your money.
How much do banks lose to check fraud? ›
Over 80% of banks use ChexSystems to assess the creditworthiness of new account holders. ChexSystems keeps most reports for about five years. Consumers receive a score ranging from 100 to 899, with higher scores being the best. Organizations lose an average of 5% of their revenues to different type of fraud every year.
Do banks take the loss for fraud? ›
Your bank should refund any money stolen from you as a result of fraud and identity theft.
Do people that commit fraud get caught? ›
So, how often do credit card frauds get caught? Unfortunately, the answer is not very often. Less than 1% of all credit card fraud cases are actually solved by law enforcement. This means that if you are a victim of credit card fraud, your chances of getting your money back are pretty slim.
What are red flags in fraud detection? ›
There are four elements that must be present for a person or employee to commit fraud: • Opportunity • Low chance of getting caught • Rationalization in the fraudsters mind, and • Justification that results from the rationalization.
What are the 3 factors to spot fraud? ›
In the 1970s, criminologist Donald R. Cressey published a model called the “fraud triangle”. The fraud triangle outlines the three conditions that lead to higher instances of occupational fraud: motivation, opportunity, and rationalization.
Fraudsters' common behavioral red flags
Management and co-workers may see warning signs of “fraudsters.” According to the ACFE reports, the two most common red flags continue to include living beyond one's means and financial difficulties. Other warning signs include: Getting too close to vendors or customers.
Can the bank trace a debit card transaction? ›
Debit card chips cannot be tracked either. They use the same EMV technology as credit cards and therefore no tracking system is embedded into the card.
Can banks see all your transactions? ›
Do banks look at your transactions? Bank tellers look at your transactions but cannot see what you purchased. Looking at the money coming in and out allows tellers to assist with your account.
Do banks track your transactions? ›
Types of Suspicious Activities Banks Look Out For
Large Cash Transactions: Banks may monitor cash transactions that exceed a certain threshold, as these transactions can be indicative of money laundering or other illegal activities.
What 6 banks are under investigation? ›
In October of 2022, nineteen states launched an investigation into JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs' involvement in the United Nations Net-Zero Banking Alliance (NZBA).
How long can a bank hold your funds for investigation? ›
Within 10 days after you notify the bank, the bank is required to investigate its records for an error; if the matter is still unresolved after 10 days, the bank must temporarily credit your account for at least a portion of the disputed amount and continue investigating for 45 days.
What happens when a bank closes your account for suspicious activity? ›
What Happens When a Bank Closes Your Account? Your bank may notify you that it has closed your account, but it normally isn't required to do so. The bank is required, however, to return your money, minus any unpaid fees or charges. The returned money likely will come in the form of a check.
What transactions are flagged? ›
What Is Flagging? In fraud, flagging is an automated or manual process performed by fraud prevention software and/or fraud analysts. Organizations are alerted to suspicious, potentially fraudulent transactions, which can then be flagged for further investigation and manual review.
What deposit amount triggers a flag? ›
Does a Bank Report Large Cash Deposits? Depositing a big amount of cash that is $10,000 or more means your bank or credit union will report it to the federal government. The $10,000 threshold was created as part of the Bank Secrecy Act, passed by Congress in 1970, and adjusted with the Patriot Act in 2002.
What raises red flags for banks? ›
Some red flags include: Overly secretive clients. Vague background information. Questionable source of funds.
The bank or credit union must then resolve the issue in 45 days, unless the disputed transactions were conducted in a foreign country, were conducted within 30 days of account opening, or were debit card point-of-sale purchases. In those cases, you may have to wait as long as 90 days for the issue to be fully resolved.
How do I get my money back from an unauthorized transaction? ›
Contact the company or bank that issued the credit card or debit card. Tell them it was a fraudulent charge. Ask them to reverse the transaction and give you your money back.
What is it called when someone steals money from your bank account? ›
Financial fraud happens when someone deprives you of your money, capital, or otherwise harms your financial health through deceptive, misleading, or other illegal practices. This can be done through a variety of methods such as identity theft or investment fraud.
Do banks really investigate fraud claims? ›
Do Banks Really Investigate Disputes? Yes. They do so as a protection service for their customers so that they don't have to worry about the ever-increasing sophistication of fraud.
What happens to the merchant when you dispute a charge? ›
Once the payment dispute is officially filed, it officially progresses to a chargeback. The funds are moved from the merchant's account to the consumer's. The merchant has no say in this; in fact, the seller may not even know about the dispute until the money is debited from their account.
How do banks dispute charges? ›
In order to approve or deny a dispute, the issuing bank will scrutinize the cardholder's claim. A bank might issue the cardholder a provisional credit while the claim is investigated, even before a chargeback is approved.
What amount of money is considered suspicious? ›
Financial institutions are required to report cash deposits of $10,000 or more to the Financial Crimes Enforcement Network (FinCEN) in the United States, and also structuring to avoid the $10,000 threshold is also considered suspicious and reportable.
What type of transactions are suspicious? ›
What Are Suspicious Transactions in Banking? Suspicious transactions are any event within a financial institution that could be possibly related to fraud, money laundering, terrorist financing, or other illegal activities.
What amount of money triggers a suspicious activity report? ›
File reports of cash transactions exceeding $10,000 (daily aggregate amount); and. Report suspicious activity that might signal criminal activity (e.g., money laundering, tax evasion).
Who investigates money fraud? ›
The FBI works with partners to investigate mortgage and financial institution fraud cases.
What triggers a Fraud Alert? Transactions that we have identified as potential fraud, including transactions outside your normal activity, trigger the alerts. It's important that you respond to these alerts to avoid unnecessary account disruption.
Do banks look at cameras for fraud? ›
Some credit card companies may have policies to check cameras if they suspect fraudulent activity. Other credit card companies may not have any policy regarding checking cameras. This article will help you better understand the types of fraud committed through credit cards and how banks deal with them.
What are red flags in bank fraud? ›
Unrestricted access to assets or sensitive data (e.g., cash, personnel records, etc.) Not recording transactions resulting in lack of accountability. Not reconciling assets with the appropriate records. Unauthorized transactions.
What are the main reasons why banks would flag an account as fraud activity? ›
Key Takeaways
Banks may freeze bank accounts if they suspect illegal activity such as money laundering, terrorist financing, or writing bad checks.
How do I know if my bank account is being monitored? ›
5 Ways You Can Tell If Your Bank Account Has Been Hacked
- Small unexplained payments.
- Unexpected notifications from your bank.
- A call claiming to be your bank demands information.
- Large transactions empty your bank account.
- You learn your account has been closed.
When the cardholder is claiming that the merchant defrauded them in some way, the bank may request more information. Merchants should always keep detailed purchase records and be on the lookout for these inquiries. If you can provide a response that satisfies the bank, that’s one less friendly fraud chargeback you’ll have to deal with.
