How Do Banks Process Disputes: The Step-by-Step Guide (2024)

A Step-by-Step Guide to the Bank Dispute Process

Chargebacks (also known as credit card disputes or transaction disputes) are a convenient way for cardholders to recover their money if a purchase was the result of fraud, or if a product didn’t satisfy their expectations. However, the process itself isn’t quite as simple as it may seem at first.

In this article, we’ll examine the bank dispute process, including what it is and how it works. We’ll also provide a step-by-step guide to help you navigate the system successfully.

What is a Bank Dispute?

Bank Dispute

[noun]/* baNGk • di • spyo͞ot/

A bank dispute is the process through which a cardholder rejects fraudulent or inaccurate charges on their credit card statement with their issuing bank. This is also known as a chargeback.

One of the most common reasons a cardholder may request a chargeback is the identification of fraudulent or unauthorized transactions on their account. Any evidence of activity that the cardholder themself did not make or approve a transaction could motivate a bank dispute. In this way, disputes are a means of protecting consumers against fraud.

If a cardholder files a bank dispute, the bank should investigate the claim. They will then decide on one of the following outcomes:

• The cardholder’s claim is untrue.
• The merchant failed to provide the goods or services promised.
• The merchant failed to implement proper antifraud procedures, allowing a criminal to complete an unauthorized purchase.

If the first option is true, then the dispute will be closed. If either of the other two options are true, though, the bank will file a chargeback on the customer’s behalf, and reverse the transaction.

Problems With the Bank Dispute Process

The bank dispute process is an important consumer protection mechanism. However, cardholders sometimes request chargebacks without a valid reason to do so. This could be because of a misunderstanding between the merchant and cardholder, or because the cardholder simply didn’t “like” the goods they received. Some cardholders may even request chargebacks while knowing that they don’t have a reason to do so.

These examples are all instances of friendly fraud. This is a growing problem that negatively affects everyone involved: it raises prices, causes market insecurity, and can even cause supply chain issues.

It’s important for cardholders to understand their role in the bank dispute process. This is the only way to ensure that the process operates as it should. With that in mind, let’s break down how to navigate the bank dispute process, and see exactly what happens at each stage of a chargeback.

Step 01 | Customer Complaint

The bank dispute process begins when a cardholder identifies a transaction they want to challenge, then contacts their bank or network to question the charge. This can happen in a few different ways, depending on the bank’s policies.

Some still require cardholders to call their local branch. For others, the process can be initiated with a few taps from the bank’s mobile app. If unsure, cardholders should contact their issuing bank directly to determine what their specific procedures entail.

Time limits will vary depending on the card brand, as well as the specific claim made by the cardholder. However, cardholders typically have up to 120 days from the original transaction or expected delivery date in which to file a dispute.

The circ*mstances in which cardholders can dispute a charge generally fall into one of three categories:

If any of the above criteria are met, the cardholder may submit their claim to their bank for further review.

Step 02 | Bank Investigates

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. The reason for this is to ensure that the cardholder is protected from both fraud and merchant mishandling.

The bank may also ask for some documentation from the cardholder, including:

• Photographs
• Mismatched tracking information
• Incorrect billing details
• Transcripts of conversations held with the merchant

Step 03 | Initial Judgement

The third step in the bank dispute process is for the bank to review the matter and approve or deny the claim. If the cardholder’s claim seems valid, a chargeback will be approved. If it appears invalid, the claim will be denied.

At this stage, the bank do one of three things:

• Reimburse the cardholder themselves and write-off the losses.
• Request more information.
• File a chargeback.

The bank may go with the first option if it’s a low-dollar value transaction (less than $25). Considering the cost involved in filing a chargeback, it may be more cost-effective to them to simply eat the losses. In that case, the bank dispute process would end here.

Step 04 | Chargeback Transmitted to Acquirer

If the bank does file a chargeback, they’ll transmit the dispute information to the merchant’s bank. This entity is known as the acquirer). The issuer will also claw back the disputed amount from the acquirer.

This process occurs strictly between the two banks. Neither the merchant nor the cardholder are invited to provide input at this stage.

Step 05 | Chargeback Forwarded to Merchant

At this point, the acquiring bank recoups the value of the original transaction by withdrawing it from the merchant's account. It could be pulled from the merchant account reserve on file with the bank, or directly from the merchant account. The acquirer will also assess an additional chargeback fee, which covers their administration costs related to the bank dispute.

Next, the acquirer forwards documentation about the dispute to the merchant. The merchant has two options:

• Accept the chargeback
• Reject the chargeback

If the merchant accepts the dispute, the process ends here. They lose the revenue from the sale, plus the chargeback fee, but do not have to engage in the process any further. If the merchant believes the chargeback was invalid for some reason, though, it proceeds to the next step.

Step 06 | Merchant Review

A merchant can be justified in rejecting a bank dispute if they believe it’s a case of friendly fraud. There are a few scenarios in which this could be the case. For instance, if the merchant believes that:

• The cardholder simply didn’t “like” the goods or service in question.
• The cardholder disliked the service provider or merchant.
• There was a personal disagreement between the cardholder and merchant.
• There were shipping delays outside of the merchants control.
• The cardholder is abusing the process to “get something for free.”

These are just a few possible scenarios. If the merchant disagrees with the reason given for the chargeback, they have the option to fight it. This is called representment, because the merchant is literally ‘re-presenting’ the transaction to the bank.

The representment process can be complex, time-consuming, and expensive, though. Merchants often choose to simply write-off the losses because fighting the chargeback would not allow them to recoup their losses.

Step 07 | Submit Representment

If the merchant does decide to fight the bank dispute, they are expected to provide documentation for the bank’s review. They need to compile evidence, which may include:

• The sales receipt or order form
• A copy of the merchant’s terms and conditions
• Descriptions and photos of the item in question
• Delivery confirmation
• Tracking information
• A copy of the return policy

These are just a few examples. The evidence will vary depending on the customer’s claim.

Along with the evidence, the merchant also needs supporting documents, like a rebuttal letter. These must be assembled and submitted according to the the requirements of the bank, and the time limits imposed by the card network.

Step 08 | Acquirer Review

At this step, the acquirer receives and reviews the information compiled by the merchant.

The bank gives the information a preliminary review to see if it's complete, concise, and compelling. If so, they forward the information along to the issuer via the card network (Visa, Mastercard, etc.). Otherwise, they may kick the package back to the merchant. If this happens, it’ll be almost impossible to resubmit the documents in time.

Step 09 | Issuer Judgement

Once the merchant’s representment package has been approved by the acquiring bank, they will forward it to the issuing bank for a final judgment. In this step, the issuer can either accept the re-presented transaction, or reject it by filing a second chargeback (called an arbitration chargeback or a "pre-arb," depending on the card network). In most cases, this is the end of the chargeback process.

Only 2% of bank disputes ever progress to the arbitration stage, which is an entirely different process that involves the card network acting as an independent third-party. This would only be warranted when both the cardholder and the merchant feel strongly about a dispute, and each has submitted evidence to support their claim. If a dispute goes to arbitration, then it's out of the bank's hands. The card network makes a final ruling.

What it All Means

Still a little confused? Don’t worry: we get it.

The bank dispute process is not simple or linear. There is a lot of back-and-forth momentum, many moving parts, and lots of variables involved in navigating the process. Despite the many hoops they must jump through, however, the process is surprisingly straightforward for cardholders. Merchants will have a harder time, given the fees and other additional headaches they will need to negotiate in order to file a winning representment.

Cardholders should continue to exercise their right to file legitimate bank disputes whenever applicable. Taking careful consideration of all the valid reasons we’ve listed for a bank dispute, and pairing them with the appropriate responses, can help defend against fraud and protect the payments ecosystem.

Merchants Have Resources, Too

If you are a merchant, having a basic understanding of the bank dispute process might not be enough.

Chargeback prevention and management are both very real concerns in today’s digital shopping landscape. Managing chargeback risk can be a full-time job all by itself. Thankfully, it’s not a job you have to do alone.

Consulting with a chargeback expert can make a huge difference in your win-rates and help keep your chargeback ratios low. Solutions for your business are just a click away.