Dispute or Payment Dispute
Payment disputes are a type of consumer protection. Cardholders have the right to dispute a credit or debit card transaction if it was unauthorized or illegitimate. If a transaction is disputed, the cardholder is no longer required to make payment. Rather, the merchant sacrifices revenue — funds are removed from the merchant’s account and returned to the cardholder.
Unlike a traditional refund, where the customer and merchant work together to resolve an issue, a payment dispute bypasses the merchant entirely. The customer’s bank (issuer) communicates with the merchant’s bank (acquirer) via the card brand.
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Bank Chargebacks vs. Cardholder Disputes
Disputes can be initiated by either the cardholder or the issuing bank.
Examples of situations in which the issuer might initiate a dispute include:
- The transaction was processed late, beyond the card brand’s allotted settlement time limit
- The merchant didn’t request authorization before processing the transaction
- The card was charged twice for a single transaction
Examples of situations in which the cardholder might initiate a dispute include:
- The goods or services weren’t delivered
- A refund wasn’t provided as promised
- The purchase was made by someone other than the cardholder
Dispute Alternatives
Not all consumer grievances escalate to a dispute. Disputes are intended to be the final option when all other attempts to solve the issue have been exhausted.
Often times, consumer grievances can be resolved if the issuer is able to obtain additional transaction information and clarify it with the cardholder. There are two ways the additional information can be obtained:
Retrieval Request
An issuer may send a retrieval request to the acquirer. The acquirer will respond with transaction information to clarify any confusion and provide additional insight.
Retrieval requests were once a popular process used by all the card brands. However, American Express® and Discover® are the only brands to currently require the use of retrieval requests.
Order Validation
There are two order validation platforms that merchants can enroll in: Consumer Clarity and Order Insight.
Through these platforms, merchants can communicate with issuers in real time. The goal is to supply enough supporting information to clarify the transaction and help the issuer “talk off” the dispute.
If neither the retrieval request nor order validation resolve the dispute, the issuer may choose to send a prevention alert.
Prevention Alerts
Prevention alert networks enable an issuer to notify a merchant when a transaction is disputed. The merchant then has the option to refund the transaction and resolve the dispute, hopefully preventing the issue from progressing any farther.
Legitimate and Illegitimate Disputes
Disputes are a much-needed consumer protection mechanism. However, they are often used incorrectly and illegitimately.
Fraud is the only legitimate reason for filing a dispute. This includes criminal activity that resulted in an unauthorized transaction. It also includes merchant fraud — situations where the merchant intentionally misled the cardholder or didn’t fulfill obligations.
Disputes filed under any other pretense are considered illegitimate. Illegitimate disputes are commonly known as friendly fraud. Friendly fraud is most often perpetrated out of convenience, as an accident or misunderstanding, or as an intentional act to get something for free.
To file an illegitimate dispute, cardholders will often make false claims, such as saying the transaction wasn’t authorized or the merchandise wasn’t received. Issuers are responsible for investigating cardholder claims and declining unwarranted dispute requests.
Dispute-to-Transaction Ratio
Card brands and acquirers monitor merchant risk with a dispute-to-transaction ratio. Exceeding the dispute-to-transaction threshold could be considered a breach of the merchant agreement and could result in the loss of the merchant account.
Financial Impact of Disputes
In addition to damaging the dispute-to-transaction ratio, each transaction dispute has financial drawbacks for the merchant too.
The dispute removes revenue from the merchant’s account and returns the funds to the cardholder. Additionally, the merchant is usually assessed a dispute fee.
Therefore, it is important for merchants to try to prevent disputes, the resulting revenue loss, and the associated costs. When disputes do happen, merchants should fight back and recover lost revenue. Without effective management techniques, disputes can cause irreparable damage to the merchant’s bottom line.
Fighting Illegitimate Disputes
Card brands allow merchants to challenge illegitimate disputes with a dispute response, which provides the opportunity to prove the validity of the original transaction.
If merchants are able to supply the required compelling evidence in the given timeframe, the issuer will review the case and reassess the initial dispute decision. Successful dispute responses will overturn the first verdict, withdrawing funds from the cardholder’s account once again and returning them to the merchant.
The dispute fee will not be refunded in cases of successful dispute response, nor will the dispute-to-transaction ratio be recalculated.
Also referred to as:
- Chargeback (Mastercard and Visa often use different terms to express the same concept. Visa uses the term “dispute”, but Mastercard uses “chargeback” instead.)
- Transaction dispute
