The Essential Guide to Provisional Credit: Everything You Need to Know

The United States payment processing solutions market continues its increasingly rapid growth. In May 2022, market research firm ReportLinker cited a market size of $90.9 billion for the year. By 2027, the payment processing solutions market is projected to reach $147.4 billion. This represents a 10.1% Compound Annual Growth Rate for the period.

These impressive figures represent many satisfied customers. However, not all buyers have been happy with their product or service experience. If they disputed the transaction, they might have received a provisional credit to their account. In this article, we’ll help you learn what this term means and how it affects a merchant’s bottom line.

What Is a Provisional Credit?

A financial institution may issue a provisional credit (or temporary credit) to a cardholder’s bank account. The account holder receives the credit during a transaction dispute. The bank generally issues the provisional credit within 10 business days of the dispute initiation. New accounts usually take longer, and these timeframes may vary.

While the bank investigates the card transaction, the customer can freely spend their provisional credit. The bank can take its money back anytime, even if this causes checking account overdrafts. Alternatively, if the bank withdraws the provisional credit, the customer’s credit card may exceed its credit limit.

A cardholder who wants provisional credit details should contact their issuing bank (or issuer). The bank will confirm the customer’s relevant account information (including their account number) before proceeding any further.

What Triggers a Provisional Credit?

This occurs when the customer disputes an electronic fund transfer (or EFT) to (or from) their FDIC-insured bank account. Customers have likely seen the “Member FDIC” tagline on their bank’s website.

Federal Regulation E provisional credits

Unauthorized electronic fund transfers can receive a provisional credit. Under Federal Regulation E, the customer also has limited liability for a stolen or lost debit card. Federal Regulation E permits consumers to dispute the following unauthorized transactions:

• Debit card transactions
• Gift card transactions
• Point of sale (or POS) transactions
• ATM transactions
• Automated Clearing House (or ACH) transfers

Regulation E does not cover these transactions:

• Paper checks
• Wire transfers
• Credit card transactions (including Visa and Mastercard purchases)

Other reasons for provisional credits

Credit card issuers (and credit card networks) issue their own provisional credits. Most often, this takes place during a chargeback dispute process.

When the customer files the chargeback request, they receive an immediate credit while the investigation proceeds. Afterward, the credit may (or may not) become permanent.

How Does a Provisional Credit Work?

First, the issuing bank (the cardholder’s bank) contacts the merchant’s bank about the disputed transaction. The issuing bank often—but not always—issues a provisional credit while an investigation progresses.

After the investigation, the issuing bank may reclassify the provisional credit as a permanent credit. Alternatively, the bank could instead decide to reverse the provisional credit.

How Do Provisional Credits Affect Merchants?

A provisional credit negatively impacts merchants in two ways. First, the purchase proceeds (plus shipping fees) are deducted from the merchant’s bank account.

The merchant is also hit with a chargeback fee. Even if the credit is reversed, the chargeback fee is not recoverable. Too many chargebacks can affect the merchant’s chargeback rate, raise their processing fees, and perhaps lead to account cancellation.

How to Prevent Provisional Credits from Becoming Chargebacks

Most provisional credits lead to a chargeback. If the merchant believes the chargeback request is invalid, they should gather documentation and fight the chargeback via a rebuttal letter.  

After the merchant submits documentation to the issuing bank, they can submit a charge representment. Stated another way, the merchant submits the original charge for reconsideration.

How representment fits in

When the cardholder disputes a transaction, the merchant can allow the chargeback to proceed. They will automatically lose the dispute, and the provisional credit will be considered permanent.

Alternatively, the merchant can attempt to reverse the provisional credit. Here, the merchant initiates a “representment” sequence, resubmitting the disputed charge to the issuing bank. The merchant should add compelling evidence demonstrating the original transaction’s validity.

The merchant’s reversal odds are slim, as the bank rarely reverses a provisional credit. Even if the merchant prevails, the bank will not return the chargeback dispute fee.

Working with the Right Payment Processor is the Key

A small business-friendly payment processor can be a merchant’s best ally. By providing great customer service, the processor can help the merchant better navigate chargebacks and other issues.

Payment Depot is known for superb customer service and transparent, month-to-month membership pricing. The company also offers affordable rates and no nuisance or cancellation fees. Contact us today to learn how you can save more on credit card processing with Payment Depot.

FAQs

Some merchants do not know how provisional credits work. These FAQs will shed some light on the subject.

Why do banks offer provisional credit?

Banks issue a provisional credit as a temporary placeholder when they may be investigating a potentially erroneous or fraudulent transaction on the customer’s account. The customer receives the temporary credit while the investigation proceeds.

The second reason for a provisional credit is customer-based. Many eCommerce shoppers are accustomed to receiving quick product deliveries. They want every transaction dispute (such as a chargeback request) to be resolved equally fast.

However, the bank knows the chargeback request may be reversed. So, the bank issues a temporary credit to satisfy customers during the investigation.

How long do these credits last?

An existing provisional credit should be available to the merchant (you) throughout the investigation. Maybe the bank determines that the charge resulted from a mistake or was unauthorized. Here, the bank will likely consider the provisional credit (or temporary credit) as permanent credit.

The customer and the merchant do not know how long the dispute investigation will take or the bank’s end decision. Therefore, many customers reach out to the merchant before contacting their bank about a disputed transaction.

Can provisional credits be reversed?

Yes, a provisional credit may be reversed. If the bank decides the disputed charge was legitimate, it will revoke the provisional credit. If an erroneous or fraudulent charge occurred, the provisional credit will be considered permanent.