What is a payment dispute?

Payment disputes are when a customer challenges a charge on their account, which can result in the issuing bank granting a chargeback. Though common, payment disputes can be avoided.

That’s where we can help. This article will explain exactly the meaning of payment disputes, what happens to the merchant when you dispute a charge, and how you can save time and money using pre-disputes solutions, such as Rapid Dispute Resolution offered through Checkout.com in partnership with Verifi.

Involved parties in a payment dispute

The main parties involved in a payment dispute are:

• The customer - who initiated the transaction and the dispute
• The merchant - who accepted the transaction initially 
• The payment processor - which is responsible for facilitating the transaction
• The acquiring bank - which manages the merchant’s account
• The issuing bank - which issued the card to the customer

The card network (e.g. Visa, Mastercard, American Express) - which facilitates the payment

How does the payment dispute process work?

If your business finds itself in a payment dispute, this is what normally happens:

1. The customer reports an issue about a specific transaction to their bank. The bank or issuer then notifies you of the dispute.
2. Your business will then investigate the transaction to find out why the customer raised a dispute claim, which may involve reviewing transaction records, communicating with the customer, or finding other documentation to support the transaction.
3. You then respond to the dispute by providing evidence or documentation to support the transaction’s validity, which normally includes proof of delivery, communication records, or other relevant information.
4. Once you’ve shown supporting evidence, the bank or card issuer reviews the evidence provided by you and the customer, and makes a decision on the dispute. If the dispute is found to be valid, the bank may reverse the transaction and credit the customer's account. If invalid, the transaction remains in place.
5. If the transaction is valid, then it’s completed and the funds are released to your business bank account. If the customer wins the dispute, the bank will pull back the transaction to the consumer. You may also be subject to other penalties, such as chargeback fees.

What does it mean to dispute a transaction?

Payment disputes happen when a cardholder, or a payment card issuer, challenges a transaction that’s already been processed by the merchant. Disputes typically happen after billing errors, fraudulent transactions, or the non-delivery of goods or services.

The card issuer will typically investigate the dispute claim to find out whether it’s legitimate. To support the claim, the merchant might be asked to provide evidence or documentation, and if the dispute is found to be valid, the issuer may reverse the transaction and charge the merchant a dispute fee.

For merchants, payment disputes can be costly and time-consuming, so it’s always a good idea to implement clear payment policies and procedures, such as rapid dispute resolution, and to communicate effectively with customers to avoid disputes whenever possible.

Difference between legitimate and illegitimate disputes

The only legitimate reason for a customer to file a dispute is because they suspect fraud. This could be a criminal that has made an unauthorized transaction using their card details, or a merchant that is either deliberately attempting to scam the cardholder or has failed to meet their obligations - e.g. fulfilling an order of goods. 

An illegitimate dispute, also known as friendly fraud, is when a customer either deliberately or inadvertently claims a transaction is invalid. This could be because they have genuinely forgotten making it, or because they are trying to get something for free by saying something never arrived when it did. 

Chargebacks vs Disputes

The terms "chargeback" and "dispute" are often used interchangeably, but they’re actually two different processes in electronic payment transactions. For instance, Visa now officially refers to chargebacks as ‘disputes’, likely because disputes are often the first step of the chargeback process.

Whether or not the dispute becomes a chargeback is up to the issuer. Before the decision is made, the cardholder must explain the dispute and provide supporting evidence. Below, we’ll explain the technical differences between the two terms.

Disputes

Payment disputes are disagreements over a specific transaction, between a customer and a merchant. Disputes can be initiated by the customer, or by the merchant's bank.

Disputes typically happen from fraud, billing errors, or dissatisfaction with products or services. Disputes are normally resolved once the bank or payment processor investigates the transaction, which may result in a reversal or tweaking of the transaction.

This is when  Rapid Dispute Resolution can help your business – it allows you to automatically refund customers in the pre-dispute phase before they become chargebacks, helping you save time and money. More on this later.

Chargebacks

Chargebacks are what happen when the issuer accepts a customer’s reason for the dispute. For example, if the issuer accepts a customer has been a victim of fraud the issuer can choose to reverse the transaction and pull funds back to them.

Like payment disputes, chargebacks are normally initiated in cases of suspected fraud, unauthorized transactions, or non-delivery of goods or services.

When a chargeback is initiated, the customer's bank reverses the transaction and credits the customer's account. You, the merchant, are also charged a chargeback fee.

As the merchant you’re typically able to dispute the chargeback and provide evidence to support your own claim, although not all types of chargebacks can be defended.

Learn more: What is chargeback representment?

How do chargebacks impact merchants?

Chargebacks can have a significant impact on your business, both financially and operationally. They can also damage your reputation. Here are the biggest ways that chargebacks can impact your business:

Financial losses

As a merchant, you’ll lose revenue from the initial sale, get heavy fines for excessive monthly chargebacks, and incur non-refundable chargeback fees. You also risk termination from your merchant account, and losing future profit on non-returned products if you have an excessive sales-to-chargeback ratio.

Operational costs

On average, it takes 20 to 30 minutes per dispute for a business to challenge disputes, making chargebacks a potentially time-consuming and expensive procedure. With the need to gather evidence and dispute the chargeback, the operational overheads can distract you from the most important areas of your business.

Impacted chargeback ratios

A high sales-to-chargeback ratio, which is the percentage of transactions resulting in chargebacks, can negatively impact your ability to obtain a merchant account or processing services.

Card schemes have strict thresholds for chargeback ratios, which can result in account termination or higher fees for your business. For example, if you have a chargeback rate of 0.65% or higher, you’re at risk of getting placed on the Visa Dispute Monitoring Program (VDMP).

Reputation Damage

Chargebacks can negatively impact your reputation, as they imply to other customers that you have a history of problems with transactions or customer service. This can result in a loss of future business.

How can merchants prevent disputes from becoming chargebacks?

There are several steps your business can take to prevent disputes from becoming chargebacks, mainly prioritizing transparency with your customers along the entire buying journey.

You should provide clear information about your products and services, shipping and delivery times, and returns and cancellation policy. This will help customers make informed decisions, and ensure they know what to expect, which should reduce the risk of disputes.

We also recommend providing tracking information, clear billing descriptors to help customers quickly identify purchases, and prompt customer support to fix issues before they escalate into disputes.

Use Rapid Dispute Resolution

One of the easiest ways to prevent chargebacks is by using Rapid Dispute Resolution (RDR) through Checkout.com in partnership with Verifi. When disputes are moved into a pre-dispute stage, this tool resolves them with automated credit to the cardholder based on your chosen rules, which means they don’t count towards your chargeback ratio, either.

RDR decreases sales-to-chargeback ratios and allows you to issue refunds in days – not months, helping to reduce overheads and improve customer relationships. As it’s automated, RDR will also save you spending up to 30 minutes on each dispute.

For businesses without RDR, you’re at higher risk of disputes following the traditional flow, which leads to costly and time-consuming chargebacks.

Block fraudulent transactions with Checkout.com’s  Fraud Detection Pro tool

Another effective way to protect your business is to block fraudulent activity using Fraud Detection Pro from Checkout.com.

Using a hybrid of machine learning and rules, Fraud Detection Pro gives you the tools to effectively block fraud, reduce friction for legitimate users and maximize revenue for your business.