A dispute, also called a chargeback, is when a consumer contests a charge on their credit card.
When someone disputes a transaction on their credit card, their bank returns the disputed amount to their account. The customer’s issuing bank, or issuer, also debits the merchant’s bank for the disputed amount. In most cases, the merchant’s bank automatically debits the merchant. This process is also called a chargeback.
Dispute timeframes vary, but customers typically have 120 days to initiate a dispute. This period begins either on the date of sale or the date a customer receives a delivery.
The next step in the process allows merchants to respond to the dispute. They can provide supporting documentation to show that the transaction was valid. The merchant’s acquirer will send the documents to the cardholder’s issuer. They also return funds to the merchant.
If the issuer agrees with the merchant’s case, the merchant keeps the funds. Some disputes are resolved at this stage.
If the issuer disagrees, the case may end up going to arbitration with the appropriate card brand—Visa, Mastercard, American Express, or Discover.
Common reasons for disputes include fraudulent transactions, canceled recurring charges, product not received, and product or service not as described.
To some degree, disputes are part of doing business with credit cards. Miscommunication and minor mistakes can occur through no fault of your own. But a high number or ratio of disputes compared to overall transactions is a problem.
Disputes are expensive due to chargeback processing fees and are time-consuming to fight. They can also reflect issues with how your business is operating.
Customers might be unhappy with your products or services or your return policies. Or your account might not be set up correctly. Too many chargebacks can even result in having your credit card processing account closed.
Here are some ways to reduce the likelihood of chargebacks:
Jessica sees a transaction for $75 that she doesn’t recognize on her credit card statement. She looks up the merchant’s name online to see if that will jog her memory, but it doesn’t. Jessica calls the phone number on her credit card to dispute the transaction.
Jessica’s issuing bank initiates a dispute, or chargeback, for “transaction not recognized.” Some issuing banks would dispute the transaction as fraudulent. But since Jessica’s card is not lost or stolen, and she recognizes the other charges on her card, they use this reason.
At the same time that they initiate the dispute, Jessica’s bank credits her account for $75. They also debit $75 from the merchant’s acquiring bank. The acquiring bank is automatically notified of the debit and the reason for the dispute.
The merchant’s acquiring bank notifies the merchant and their credit card processor of the dispute. They also pass the debit of $75 to the merchant, American Health Services.
Now, American Health Services can respond to the dispute. For this type of chargeback, they need to provide any information to help Jessica recognize the transaction.
The $75 was for an online order, so there isn’t a signed receipt. Instead, the merchant provides an itemized invoice, a copy of the email confirmation, tracking number, and proof of delivery.
The credit card processor sends the documentation to Jessica’s issuing bank. They also repay the funds to the merchant. They notify the merchant that if Jessica continues the dispute, they will receive another debit. This step is called pre-arbitration.
Jessica’s issuer shares the documents with her. She realizes that she now recognizes the transaction, and her bank debits her again for the $75. The dispute is now resolved.
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