When a merchant receives a dispute, there are two options. They can respond to the dispute with compelling evidence to try and get their funds returned. Alternatively, they can accept the dispute, which tells the card network and issuing bank that they will not be fighting the customer's claims.
For merchants responding to a dispute, creating the response can be a tedious and time-consuming task. So merchants may be asking, "Should I respond to this dispute? Can I even win it?" In this post, we will look at the different types of disputes, which ones merchants can win, and how.
Four Dispute Categories
Each card network has unique reason codes. These codes help explain to merchants why the cardholder disputed the charge and how they should respond. While each network has its own codes, all disputes causes can be broken down into four categories: authorization, consumer disputes, fraud, and processing errors.
Authorization chargebacks represent disputes related to authorization issues. For example, transactions where authorization was required, but not obtained. They can also represent disputes where an authorization request received a decline or pickup response, and the merchant completed the transaction anyway.
Consumer disputes represent chargebacks initiated by the cardholder in regards to product, service, or merchant issues. Consumer disputes are also referred to as cardholder disputes, cardmember disputes, and service chargebacks. The reasons for consumer disputes vary; and can include circumstances like goods not received to canceled recurring billing.
The fraud category is used for reason codes related to fraudulent transactions. Reason codes related to no cardholder authorization, EMV liability, card-present, and card-not-present fraud are all found within the fraud category.
Processing errors, also referred to as point-of-interaction errors, categorize reason codes representing disputes including duplicate processing, late presentment, credit processed as charge, invalid card numbers, addendum/"no show" disputes, incorrect charge amounts, and other similar situations.
Three Types of Payment Fraud
Next, we will go over the types of payment fraud. There are three types of payment fraud: true fraud, chargeback fraud, and friendly fraud. These types of fraud help merchants determine if a dispute is winnable.
True fraud is when a fraudster has got ahold of credit card credentials and successfully makes a purchase at a merchant's site or store. The actual cardholder disputes the charge, which results in a merchant receiving a true fraud dispute.
Chargeback fraud is when a cardholder makes a purchase, but they dispute the charge for malicious reasons. This could include buyer remorse, flip fraud, poor budgeting, or various other reasons. The goal of a chargeback fraudster is to retain the merchandise and get their money back from the transaction.
Friendly fraud is when a cardholder mistakenly disputes a charge they actually authorized. Friendly fraud disputes happen because of misunderstandings, unclear merchant descriptors, or a family member making an unknown purchase.
What Dispute Merchants Can't Win
Now that we’ve covered the basics of disputes and the types of fraud that can come with them, let's look at what disputes merchants are not able to win.
Valid disputes mean that the merchant has made a mistake and the cardholder has a valid reason to dispute a charge. For example, a consumer dispute comes in claiming that the cardholder canceled their subscription, but they still got charged. As the merchant takes a closer look, they see the software must have glitched because the cardholder did submit their information to cancel their subscription correctly, but the system didn't take them out of the billing process. If the merchant finds that there was a mistake on their end, they should accept the chargeback to save the time of responding. Merchants should not refund the cardholder once a dispute has been initiated. It could result in the merchant's account being debited twice.
When valid disputes happen, merchants should track where the dispute comes from. It can show where there are issues in operations, fulfillment, or billing. Addressing these issues can make the operations of the company smoother and reduce chargebacks overall.
As we mentioned earlier, true fraud is when a fraudster obtains credit card credentials and successfully makes a purchase. A true fraud dispute is not winnable for merchants. It is the merchant's responsibility to prevent fraudulent purchases from happening. This is because of the Zero Liability Guarantees and the Fair Credit Billing Act. Each card network has a policy taking the liability off of cardholders for fraudulent purchases. For example, Visa's Zero Liability Policy ensures that cardholders are not held responsible for unauthorized transactions. The policy covers U.S.-issued cards and requires the cardholder to notify their financial institution immediately in the event of any unauthorized card use.
Some merchants may assume that all fraud category disputes are true fraud and won't bother responding to the dispute. Although true fraud disputes are not winnable, merchants should still respond to fraud disputes. This is because a dispute could be coming from a chargeback or friendly fraudster claiming the transaction is fraudulent, which means the dispute is winnable.
When the EMV Liability Shift happened, the liability for counterfeit fraud switched to the merchant. Previously, disputes from this type of fraud never made it past the issuing bank. Now, if a merchant is not compliant to the EMV chip requirements and the cardholder disputes a purchase, the merchant is liable. The liability shift encouraged merchants to switch their POS card readers to EMV capable ones.
The only way to win a dispute like Visa Reason Code 10.1 EMV Liability Shift Counterfeit Fraud, is to submit evidence that the EMV chip was read and that all of its data was transmitted to Visa. This documentation includes proof of the terminal being EMV PIN-compliant; and an imprint or signature that was created by the cardholder.
True fraud, EMV, and valid disputes are the only types of disputes merchants are not able to win. It is vital to make changes and put preventive measures in place to stop unwinnable disputes.
How Merchants Can Win Disputes
So, how can merchants win all the other types of disputes? By creating a well-crafted dispute response document, merchants can discredit the cardholder's claims and regain the transaction amount. The first step in crafting a dispute response is to look at the specific reason code. Reason codes help merchants understand why a transaction, good, or service was disputed and gives the specific, compelling evidence needed to present a solid case to win the chargeback properly. Most reason codes have unique evidence required to win a dispute, which means merchants need to do their research before responding. Dispute responses are the most powerful when compelling evidence is provided as directed by the specific card network rules and regulations.
Need help with crafting a dispute response? We have created downloadable response templates to guide you through the dispute response generation process.