In 2023, 44% of U.S. consumers disputed a purchase because it was made by someone else using their payment information. Transaction disputes are on the rise and pose a direct threat to the revenue and reputation of any business with an online presence.
You’ve probably handled transaction disputes before, but do you know the “why” behind them? For many companies, what starts out as just an occasional chargeback can quickly become a significant drain on their operational and financial resources.
Read on to find out what causes transaction disputes, how to resolve them efficiently, and discover the best strategies to prevent them from happening in the first place.
What is a Transaction Dispute?
A transaction dispute is what occurs whenever a cardholder questions or challenges a charge on their credit or debit card statement. It’s a process designed to protect consumers from fraudulent or unauthorized transactions. Unfortunately, it’s also a process that is frequently taken advantage of. Research shows that true fraud (fraud as a result of third-party criminals stealing payment information) accounts for less than half of all disputes.
The rest are either genuine merchant errors or instances of what’s known as friendly or first-party fraud. For first-party fraud, it’s the legitimate cardholder, not another fraudster, that commits the abuse by falsely claiming fraud in order to get their money back. This is a breach of the trust merchants place in legitimate customers and is, consequently, very difficult to stop. However, with the right fraud prevention solution, it’s possible to mitigate these threats.
What Qualifies as a Legitimate Dispute?
To build effective prevention, dispute management, and resolution strategies for transaction disputes, it’s important to understand why they occur. Here, you’ll find a list of the most common, valid reasons for transaction disputes.
- Unauthorized transactions: This is true fraud—charges made without the cardholder’s permission or knowledge, often due to data breaches or account takeovers. Unauthorized transactions can not only lead to a financial loss for the consumer, but also can indicate a breach in security. Learn more about combating payment fraud.
- Goods or services not received: This issue usually stems from shipping errors, stock shortages, or miscommunication between the merchant and the customer. Such disputes highlight failures in the order fulfillment process, leading to dissatisfied customers.
- Defective or misrepresented products: Another common cause of disputes is defective or misrepresented products. This can arise from manufacturing defects or misleading product descriptions. These issues can damage a merchant’s reputation, as customers feel they did not get what they paid for.
- Duplicate charges: Transaction disputes can also arise from unexpected charges. Duplicate charges can be caused by processing errors, system glitches, or human mistakes.
- Incorrect amount charged: When the amount billed does not match the list price, disputes arise. This discrepancy can be caused by clerical errors, incorrect data entry, or misunderstandings during the transaction process.
- Canceled recurring transactions: These disputes occur when customers continue to be charged for subscriptions or services they have canceled. This can happen due to administrative oversights, delays in processing cancellations, or system errors.
- Credit not processed: Finally, ‘credit not processed’ disputes arise when a merchant agrees to refund a purchase, but fails to process the credit. This can be due to internal processing delays, administrative errors, or, again, miscommunication.
If a customer genuinely has experienced one of these issues, merchants are obligated to help resolve their problem, either by providing a refund or by re-attempting to fulfill their order. On the other hand, if the merchant finds evidence of first-party fraud, they can use that to contest the dispute with the customer’s bank and avoid paying out a fraudulent refund.
Transaction Disputes vs. Chargebacks
A transaction dispute occurs when a customer and a merchant disagree over a purchase, often leading to direct communication to resolve the issue. If the dispute is not resolved, the customer may escalate the matter by initiating a chargeback through their bank, resulting in a forced reversal of the transaction.
Transaction disputes typically arise when a customer first notices a problem with a transaction. At this stage, you have the opportunity to address their concern without third-party involvement. However, if the customer proceeds with a chargeback, you must then defend the legitimacy of the transaction. Due to the difficulty of providing concrete evidence, banks often side with the cardholder, resulting in fees and the loss of the transaction amount for you.
Chargebacks have a more significant financial impact than transaction disputes, which can often be settled with a simple refund or exchange. Beyond the immediate loss of revenue, chargebacks also carry additional fees and potential reputational damage.
Understanding the Transaction Dispute Resolution Process
It’s important to remember that transaction disputes should always follow a step-by-step process that solves customer problems efficiently. Understanding this process is crucial in achieving faster resolutions and better outcomes for all parties involved. Here’s what the process typically looks like:
Cardholder Identifies an Issue
Transaction disputes start with the customer. This usually happens when they spot an unfamiliar or incorrect charge on their statement. The cardholder might find unauthorized transactions, charges for goods or services they haven’t received, or discrepancies in billed amounts.
Cardholder Contacts the Merchant
Unless they suspect fraud (due to being completely unfamiliar with the merchant listed in the transaction, for example), customers will often contact the merchant to request a solution to their problem before reaching out to their bank.
This step can lead to a quicker resolution for all parties, as merchants can address errors, offer refunds, or provide missing goods or services without the formal chargeback process. Direct communication can help clarify misunderstandings and prevent escalation to a bank dispute. For merchants, it’s crucial to be prompt and ensure that customers feel it’s easy to get in touch with you to have their problems addressed.
Cardholder Contacts Their Bank
If negotiations fail, or you are never contacted in the first place, the customer may decide to tap the “Dispute Transaction” button in their banking app or call their card issuer. At this stage, the customer will explain the nature of the dispute to their bank and provide initial information to support their claim. The issuing bank’s customer service team logs the dispute and then begins the initial review.
The Bank Investigates the Claim
Banks do not take every single transaction dispute at face value. The issuing bank always reviews the claim, collects information from the cardholder, and may also request supporting documentation such as receipts, communication records with the merchant, or any other relevant evidence. If the bank assesses the claim to be valid, the dispute moves to the next stage.
The Merchant Responds
If the issuing bank finds the claim potentially valid, it notifies the merchant of the dispute. The merchant is then required to provide evidence defending the transaction’s validity. This evidence may include proof of delivery, transaction records, customer communication, or any other documentation that verifies the transaction was legitimate and authorized. How you respond as a merchant is crucial in determining the outcome of the dispute.
The Bank Provides Resolution
Based on the evidence provided by both the cardholder and merchant, the issuing bank makes a decision. The bank evaluates all submitted information to determine whether the dispute should be upheld in favor of the cardholder if the transaction is valid and the merchant’s evidence is sufficient. If the dispute is upheld, the cardholder is refunded, and the transaction results in a chargeback. If the bank rules in favor of the merchant, the transaction stands, and no refund is issued to the cardholder.
In reality, banks most often give the cardholder the benefit of the doubt as long as the claim falls within their acceptable reasons for disputing a transaction. This is why it’s crucial to prevent transaction disputes before they escalate to this level.
8 Ways to Prevent Transaction Disputes
Transaction disputes are not inevitable. Many can be prevented by taking proactive measures to optimize key business processes throughout different departments, from customer service to billing and order fulfillment. Here are eight practical strategies you can implement immediately to reduce the number of transaction disputes you encounter:
Clear Communication
Ensure that your product descriptions, pricing, and terms of service are accurate and easily understood by customers. Ultimately, a transaction dispute is an expression of missed expectations. Direct messaging ensures that your customers know exactly what they are getting, strengthening customer satisfaction.
Reliable Shipping and Tracking
Optimize your order fulfillment processes. Only use reputable shipping services and provide customers with tracking information to reduce “goods not received” disputes.
Responsive Customer Service
Many customers decide to dispute transactions as a result of silence on the part of the merchant. If you leave your customers nowhere else to go, they will take their problems to their card issuer, leaving you to foot the chargeback fees. However, if you provide responsive customer service, you can prevent escalation and reinforce customer relationships.
Secure Payment Processing
Implementing powerful payment fraud prevention measures, such as encryption, tokenization, and two-factor authentication, helps minimize unauthorized transactions. By securing the payment process, you can significantly reduce the likelihood of fraudulent activities.
Unambiguous Billing Descriptors
Using easily recognizable business names on credit card statements helps prevent confusion among customers. Informative and accurate billing descriptors ensure that customers can quickly identify legitimate transactions, reducing the chances of disputes due to unrecognized charges.
Proper Documentation
Maintain detailed records of all transactions, including customer communications and shipping information. Comprehensive documentation allows you to verify the validity of transactions and respond effectively to any claims, reducing the risk of unresolved disputes escalating to chargebacks.
Proactive Refund Policies
Offering fair and clearly communicated refund policies addresses customer dissatisfaction before disputes arise. By being proactive and transparent about refund procedures, businesses can resolve issues amicably, preventing customers from feeling the need to escalate their complaints to banks.
Regular Account Reconciliation
Regularly monitor and review transactions to catch and correct errors quickly. Use AI to detect and mitigate fraud. This enhances your transaction security by identifying suspicious activities and potential discrepancies in real time. By maintaining accurate accounts and promptly addressing any anomalies, businesses can prevent many disputes before they occur.
Why Sift is the Best Partner for Transaction Dispute Management
Transaction disputes arise from one of three sources: fraud, merchant error, or customer error. Ultimately, preventing transaction disputes requires implementing a wide range of strategies to ensure that your operations are optimized and you’re meeting the expectations of your customers.
Designed to reduce fraud and transaction disputes, Sift’s payment fraud and chargeback solutions support your ability to protect revenue and manage disputes, including:
- Real-time User Insights: Enable instant risk detection and prevention for transactions, stop fraudulent money transfers, and safeguard against alternative payment abuse. Automate decision-making, reduce manual review, and get insights in real time.
- Machine Learning Automations: Get intelligent response recommendations to identify missing evidence and strengthen your case when contesting disputes.
- Streamlined Process: Manage all disputes within one easy-to-use platform that enables you to make data-driven decisions, organize ongoing disputes, and manage assignments.
- High-Value Chargeback Prioritization: Automatically highlight high-value chargebacks, supporting prioritization and higher win rates and ensuring maximum revenue protection.
- Highly Customizable: The platform is customizable to provide just the right blend of automation, self-service, and managed services to suit your unique business needs.
Learn more about how Sift can help you prevent transaction disputes and first-party fraud, manage chargebacks, and help you navigate the next generation of payment fraud.
