How to Handle a Disputed Merchant Credit Card Transaction: A Step-By-Step Guide

How to Handle a Disputed Merchant Credit Card Transaction: A Step-By-Step Guide

The phrase “disputed transaction” is one that no merchant ever wants to hear. Yet this is becoming an increasingly common reality for many eCommerce businesses.

By 2023, the average cost of a chargeback for a merchant is forecast to be $190, based on a $90 average transaction value. Unless you can get a firm handle on disputes at your business and what is causing them, you could be looking at thousands of dollars of lost revenue.

Fortunately, there’s a lot that merchants can do to reduce the number of disputes leveled against their business—and it all starts with understanding how merchant credit card transaction disputes work.

In this article, we’re going to cover the common FAQs related to transaction disputes and chargebacks and provide a number of actionable tips to avoid disputes from taking place.

Disputed Transaction_Chargeback Cost_Infographic

What Is a Transaction Dispute?

A transaction dispute is when a consumer questions the validity of a purchase made using a credit card or debit card. A disputed charge can happen for several reasons, including unauthorized charges, a disputed amount being charged, or a promised service not being fulfilled.

Disputed charges have become especially common, thanks to the growth of eCommerce and card-not-present transactions. Online banking has also made it easy for cardholders to begin the dispute process directly via their bank account, rather than having to speak to the merchant first.

Not surprisingly, disputes can end up being very costly to small businesses. In addition to lost revenue, there’s also the cost of potential chargeback fees which range anywhere from $20 to $100.

The Dispute Process

Now that we’ve covered what a dispute means, let’s take a quick look at the various steps of the dispute process.

1. The Cardholder Initiates a Complaint About a Transaction

The reasons for disputed charges vary (we’ll cover this in the next section). Most likely, it’s because of unauthorized activity or not receiving the service specified by a merchant. To begin the dispute process, the cardholder will need to contact their issuing bank

This is done either by calling a phone number or filing the dispute directly via their bank portal. If the concern is a fraudulent transaction, the Federal Deposit Insurance Corporation (FDIC) recommends that a police report is filed.

2. The Card Issuer Reviews the Situation to Determine Whether the Dispute is Valid

The issuing bank is responsible for investigating the dispute and deciding whether to issue a chargeback against the merchant. To do this, they may ask for additional information. For example, if a customer is disputing a charge for a subscription they previously canceled, the bank may ask for proof in the form of an email that this cancellation took place.

If the bank decides that the dispute isn’t valid, the cardholder is responsible for paying for the transaction. But if there are grounds for the dispute, the bank will issue withhold funds from the merchant relating to the transaction and any applicable fees, pending a formal chargeback to the acquirer. It’s a good idea to check the regulatory disclosures within your card agreement for more details.

3. The Merchant is Notified and May Contest the Chargeback

In most cases, a merchant can only contest a chargeback once funds have been withheld. When they receive this notification, they’ll be provided with documentation relating to the dispute, including a reason code. A merchant and their acquiring bank usually have between 5-7 business days to contest the chargeback.

If the merchant decides to contest the dispute and chargeback, they need to prove the service was provided or that the billing amount was correct. This could include an invoice or shipping and delivery confirmation from the parcel carrier. This is sent to the acquiring bank, which will contest it on the merchant’s behalf.

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4. The Issuing Bank Makes he Final Review and Decision

Once it has reviewed additional information from the merchant, the issuing bank will decide whether or not to issue a full chargeback or stop withholding the funds. In cases where the issuing and acquiring banks can’t agree, the card network itself may step in as a third party to issue the final ruling.

5. The Issuing Bank Formally Issues a Chargeback

If the dispute is decided in favor of the cardholder, the issuing bank will issue a chargeback against the merchant via the acquiring bank, along with a chargeback fee.

What Causes Disputed Transactions?

There are several types of disputes which are commonplace in eCommerce, some of which are under a merchant’s control (and some that aren’t):

Errors By The Merchant

These customer disputes involve anything where the merchant hasn’t followed through on their commitments. This includes:

  • Shipping the customer the wrong size item
  • Charging the wrong amount to a card account
  • Not canceling or pausing a subscription
  • An order not arriving

Because this is down to either technical or human error, these disputes are relatively straightforward to solve. But rather than going to a merchant, many customers will simply go to the card issuer and request a chargeback.

Unrecognized Transactions

This scenario is one that most of us are familiar with. We check our bank account and see a card charge that we don’t recognize. If we can’t find any additional information or a family member doesn’t recognize it either, we’ll probably end up filing a dispute.

When consumers have so many recurring and one-off purchases on their statements, it’s easy for there to be confusion over what a charge relates to. This is made worse when merchants don’t use intuitive billing descriptions, resulting in unnecessary chargebacks that cost valuable sales.

Fraudulent Charges

Online payment fraud is a growing problem in eCommerce, but there are several different kinds of fraud that results in credit card disputes.

The so-called “friendly fraud” is when a customer tries to get money back without a legitimate reason to do so. If the customer is trying to keep an item after getting a refund, this is also known as “cyber-shoplifting.” 

Alternatively, customers may request a chargeback to express displeasure at a merchant for bad service. Friendly fraud differs from criminal fraud, where account numbers or card numbers are stolen from cardholders to process transactions without their knowledge.

Because issuing banks typically side with the customer in disputes, it’s quite easy for shoppers to get away with this behavior. As a result, friendly fraud is the most common type of chargeback, costing merchants over $25 billion a year, according to the National Retail Federation.

Disputed Transaction_Friendly Fraud_Infographic

Disputes vs. Chargebacks

The terms “chargeback” and “disputed transaction” are often used interchangeably, which can be confusing for merchants. In fact, some card companies such as Visa have taken to referring to the entirety as a dispute, including the chargeback process. So, what is the difference?

There are several consumer protection laws, namely the Electronic Fund Transfer Act and The Consumer Credit Protection Act, that give consumers the right to dispute any credit card transaction they believe involves fraudulent activity or the merchant not delivering what was promised.

However, a disputed credit card charge doesn’t necessarily progress to a chargeback. This depends on two key factors:

  • Whether the merchant can resolve the dispute bought by the cardholder e.g. billing errors.
  • Whether the card brand itself offers its own chargeback process.

So, while consumers can bring a dispute claim, a formal chargeback only takes place when the card network (e.g. Mastercard or American Express) offers its own chargeback process. If this is the case and the customer has reasonable grounds, the issuing bank will grant the request for a chargeback for the transaction amount.

In sum, any chargeback is considered a disputed transaction, but not all disputes are chargebacks.

Disputed Transaction_Dispute Vs Chargeback_Infographic

4 Steps to Reduce or Prevent Disputes

Let us now take a look at some ways in which merchants can minimize disputes from taking place to an extent.

1. Analyze the Reasons for Your Most Recent Chargebacks

It’s difficult to prevent disputes and chargebacks unless you know why they’re happening in the first place. If your business is frequently dealing with disputes, it’s important to investigate the reasons behind them and whether there are any recurring trends.

For example, if you’re seeing a lot of disputes happen due to subscriptions not being paused or canceled after a customer request, this indicates you need a better subscription management solution. If you’re experiencing an uptick in friendly fraud, such as customers wanting to claim refunds on items by pretending they didn’t arrive, a delivery tracking system helps to safeguard against this.

2. Have Clear Billing Descriptors

As mentioned above, many disputes are the result of simple confusion when a cardholder doesn’t recognize a card-not-present transaction. This happens when a business isn’t using a clear descriptor in their billing details, making it difficult to identify where a credit card charge came from.

Descriptors are usually between 20 and 25 characters, so you may need to abbreviate your business name. Make sure it’s clear who the transaction is from. Stay away from using parent company names, as this might not be recognized by your customer.

3. Make Sure Your Team is Fulfilling Orders Accurately

Order fulfillment plays a key role in your ability to avoid disputes, as many chargebacks happen due to mistakes relating to fulfillment and shipping. For example, if you accidentally ship a customer the wrong product or an order is delayed, a customer might pursue a dispute to get their money back.

To avoid this, make sure you have streamlined order fulfillment processes in place that can pick up issues before they arise, like using sturdy packaging to avoid damage and order tracking to make sure that a purchase makes its way to its intended destination.

4. Have a Stellar Customer Service Strategy

Ideally, you want to resolve issues with your customers directly, rather than having them bring a dispute claim. However, a customer isn’t going to file a support ticket with your business unless they have confidence you can handle their complaint.

Rather than waiting for a customer to reach out to you, be proactive by sending them regular emails after their order has been placed. These emails should contain order tracking updates in addition to links to your customer service channels such as email, phone, social media, and live chat.

By ensuring that customers know where to reach you before an issue happens, it’s more likely they will try to resolve an issue with you directly.

The Bottom Line

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Dealing with transaction disputes is extremely draining on a merchant’s time and energy. Having to keep contesting chargebacks and presenting evidence to banks might result in some rulings in your favor, but it can mean significant opportunity costs for your business.

Why? Because time wasted dealing with disputes is time that you aren’t spending on your marketing and branding strategies. In the long term, this can seriously chip away at your position in the marketplace.

By developing approaches to stop disputes before they take place, merchants can feel more confident in their revenue projections and the quality of their customer service. And if shoppers are satisfied with their experience, they’re far more likely to shop with a business again and further strengthen your bottom line.

You should also consider partnering with a payment service provider like Payment Depot that offers risk monitoring and round-the-clock customer service so you don’t have to deal with disputes on your own. Contact us today to learn the various ways we can help your small business minimize disputes while saving more on credit card processing

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