For both cardholders and merchants, the process by which banks analyze and investigate fraud claims can be slow and frustrating. Even when the fraud appears to be obvious, cardholders who have been victims of credit card fraud may feel as if the bank is taking an eternity to close the investigation. The number of highly suspicious fraud claims that result in chargebacks can lead merchants to wonder if the bank even investigates fraud claims at all.
The major card networks establish some of the basic rules for inspecting fraud, but individual banks have a lot of flexibility when it comes to carrying out the process. Banks, fortunately, have their own incentives to combat fraud, and there are some standard operating procedures for conducting these investigations. What does a bank do when it receives a credit card fraud complaint?
One issue is that when it comes to fraud, banks, customers, and merchants don’t always speak the same language. Customers may use the term “fraud” to refer to a variety of complaints or issues they may have with exchanges, many of which may or may not fall under the legal standard of fraud. We talk about “true fraud” and “friendly fraud” in the world of merchant chargebacks, two vastly distinct things that aren’t as closely related as their names suggest.
It can be difficult to sort through the various types of fraud, especially when merchants are attempting to make sense of their chargeback info for analytical purposes. Knowing how the bank handles fraud claims, what kind of timeline to anticipate, and what course of action they are prone to take can be beneficial.
What Are The Various Forms Of Fraud?
When a scammer steals a cardholder’s payment login details and uses it to make a purchase, this is called true fraud. When a cardholder denies a transaction and gets a chargeback based on false claims, this is known as friendly fraud, renowned as chargeback fraud or credit card dispute fraud.
When a cardholder requests a chargeback on a transaction, they are claiming that they did not authorize the transaction or did not receive what they paid for. In scenarios of true fraud, the majority of legitimate disputes arise.
If a customer does not receive what they paid for, they must contact the merchant prior to disputing the charge, which usually results in the merchant issuing a refund or some other form of compensation. In exceptional circumstances, a merchant may deny to refund an undelivered or defective purchase, where the customer may file a dispute.
Both the cardholder and the merchant can be viewed as victims of true fraud. The cardholder’s data was stolen and misused illegally, whilst the merchant will bear the financial burden. Friendly fraud, on the other hand, involves the customer defrauding the merchant. These types of fraud can be further classified as credit card fraud, account takeover fraud, and so on.
When A bank Receives A Fraud Claim, What Happens Next?
The bank’s first step will be to try to prove that fraud has occurred. They’ll ask the cardholder for more information about the transaction, including how they know it’s a scam. Before a fraudster goes for a big payout, small, easily ignored card testing purchases often add up.
It can take a lot of time and effort to research and document all of these transactions in order to satisfy the bank. The cardholder will not be held liable for more than that amount if the fraud claim is substantiated. Many banks even have policies stating that if fraud occurs, the customer will not be held liable for any amount.
The Electronic Fund Transfer Act governs debit card fraud, requiring cardholders to inform banks about fraudulent transactions within 60 days of the transaction; if they do not, the bank is not obligated to respond. Furthermore, if the bank is informed within two days of the transaction, the cardholder’s liability for fraud is limited to $50. Most banks, on the other hand, give customers 120 days to claim a fraudulent charge and have much more generous liability policy ideas than are required by law.
The bank has 10 business days to examine the claim and make a decision after being notified. They must pay back the cardholder if they discover fraud has occurred.
The bank can take up to 45 days to investigate, but they must at least momentarily return the funds to the cardholder’s account by the 10-day deadline. When a dispute is filed, many banks expedite the process by giving a provisional credit.
What Methods Do Banks Use To Investigate Fraud?
Typically, bank investigators will start with transaction data and look for possible fraud indicators. Time stamps, location information, IP addresses, and other aspects can be used to show that the cardholder was present during the transaction.
The bank may ask for more information if the cardholder claims that the merchant has deceived them in some way. These inquiries should always be on the prowl for merchants. A chargeback is avoided for any inquiry that can be adequately addressed.
Since bank investigators are trained to recognize common factors such as a free trial period expiring, in-app purchases made by an unattended child, and so on, they should be able to detect friendly fraud when it occurs.
This does not always happen, as merchants are aware.
Friendly fraud chargebacks are a major issue for merchants, who must take it on themselves to provide proof that these claims are false. You can read this guide on how to apply and request for a chargeback here. The bank may inform law enforcement agencies such as the FBI if they are certain that fraud has occurred and believe the case is serious enough to warrant it.
Of course, it is up to the investigating agency to decide whether or not to start an investigation.
How Do Fraud Victims Recover Their Funds?
When a transaction is found to be false during the normal chargeback process, the issuing bank immediately credits the customer’s account with a provisional credit.
Things get a little more complicated when a merchant receives a friendly fraud chargeback. This type of fraud is more difficult to prove, and when in doubt, banks usually side with the customer. Recovery of funds lost to friendly fraud will take time.
It is up to the issuing bank to decide which claims to believe. The merchant must provide proof that the bank finds convincing enough to reverse the chargeback in order to win the dispute. While the bank’s choice can be overturned through arbitration, the costs are typically in the hundreds of dollars, so it’s rarely the best option for most merchants. If a business is considered to be high-risk, you might need a high-risk merchant account.
Conclusion
The gist is that you can file an inquiry for a charge back with your bank if an amount has been debited from your account but not credited to the relevant merchant’s account, as well as in cases of fraud and denial of the vendor’s service promise.
