Tips for Managing the Credit Card Fraud Investigation Process

No business wants to find themselves in the middle of a chargeback dispute. And unfortunately, in most credit card fraud investigations, the chips are stacked in favor of the consumer ­– not the merchant.

Should you find yourself in this position, here’s what you need to know about managing the investigation process so you can ensure your rights and needs are adequately protected.

What Are Chargebacks?

A chargeback is simply a reversal of transferred funds. When a customer disputes a credit card charge, the card issuer typically immediately debits from the merchant the original sale amount and credits the customer. To add insult to injury, the card issuer then assesses a chargeback fee to the merchant. This means the merchant is debited the original proceeds, and is assessed a chargeback fee and doesn’t receive back the disputed goods—a lose-lose situation.

Although the chargeback process is intended to increase a consumer’s confidence when purchasing goods online, it can potentially be an expensive, time-consuming hassle for merchants. Ultimately, the business shoulders the entire burden of proof to establish that the disputed transaction was legitimate.

What Is the Chargeback Process for Merchants?

While the chargeback process isn’t simple or fast (sometimes taking up to six months to complete), here’s generally what happens:

  1. The cardholder initiates a dispute. The cardholder opens a credit card dispute with the card-issuing bank about a specific transaction. There are myriad reasons a cardholder may file a dispute, including the:
    • Product never arrived
    • Retailer shipped the wrong product
    • Product didn’t match website description
    • Customer claims he didn’t make the purchase

(While some of these claims are legitimate, some claims are what is known as “friendly fraud.” This occurs when a consumer purchases a product with the intent of filing a fraudulent claim, which essentially means the consumer gets the product for free.)

  1. The issuing bank reviews the transaction. The bank that issued the consumer’s credit card reviews the evidence to determine the claim’s validity and whether to proceed with a chargeback.

    If the dispute is deemed invalid, the chargeback process ends and the issuing bank notifies all parties of the decision. If the dispute is deemed valid or at least worthy of further investigation, the chargeback process continues.
  2. The issuing bank refunds the cardholder’s money. The issuing bank refunds the cardholder’s money for the disputed amount and debits the merchant’s commercial bank account in the same amount.
  3. The chargeback is submitted to the card network, then the acquiring bank. After the card networks receive the chargeback, it’s passed to the acquiring bank. It’s here that the merchant incurs and must pay fees from payment processors and acquiring banks — ranging from $50-$100 (or more) per transaction.
  4. The acquiring bank forwards the chargeback to the merchant. The merchant receives the chargeback information, including the reason for the chargeback. The merchant can then decide how to respond to the chargeback.
  5. The merchant responds to the chargeback. The merchant can gather evidence to support the transaction. This data can come from various sources — such as the payment processor or shopping cart platform — and may include data such as:
    • Date/time stamp
    • Shipping and address verification
    • CVV/CVC match
    • Past transactional history
    • Customer communication from chats, emails and phone calls

The merchant then sends a chargeback response letter, with supporting documentation, to the acquiring bank.

Note: Merchants aren’t required to respond to a chargeback. Some may choose not to respond because of a low transactional value or the belief that a merchant can’t win a dispute. If a merchant doesn’t respond, the chargeback process ends with a ruling in favor of the customer; the merchant is left with the loss in revenue, loss of merchandise, lost shipping/handling fees and the chargeback fees.

  1. The acquiring bank sends the evidence to the issuing bank. The merchant’s response flows from the acquiring bank through the card network to the issuing bank. The issuing bank reviews the merchant’s evidence to determine the validity of the customer’s chargeback claim.

    If the chargeback is deemed valid, the chargeback is upheld and the returned funds stay with the customer. If it’s deemed invalid, the issuing bank declines the chargeback and pulls the funds from the issuing bank back into the merchant’s commercial bank account.

    Note: Even if the merchant wins the dispute, the customer has the right to place a claim on the transaction a second time, repeating this costly process.

Who Pays the Price for Chargebacks?

Ultimately, it’s merchants who pay the price for chargebacks. And it’s not an insignificant amount. Chargebacks account for 70% of fraud and cost merchants nearly $11.2 billion in lost revenue in 2015.

But beyond experiencing the monetary loss due to fees and unreturned products, merchants can also suffer from:

  • Loss of marketing investment
  • Negative effect on image
  • Lost customers
  • Additional fines and penalties if the business has exceeded its chargeback limits (Businesses should strive to keep their chargeback ratios — the total number of chargebacks divided by the total number of transactions during one month —under 1%.)
  • Termination of its merchant account by the bank or credit card processor

What Can Merchants Do to Avoid Chargebacks?

Although chargebacks are an unavoidable cost of e-commerce business, they can — and should — be minimized. With chargebacks rising 20% each year and costing merchants upward of $50 in fees per dispute (even if the cardholder’s claim is rejected), the financial impact is significant.

Some of the ways merchants can minimize chargeback risks include:

  • Listing product descriptions, including pictures from multiple angles, for each online item
  • Ensuring customers know what company name they can expect to see on their credit card statement after making a purchase
  • Using an address verification service to compare credit card information with that which is on file at the credit card company
  • Obtaining CVV/CVC codes for each order
  • Being wary of bulk orders, sales of big-ticket items and orders requesting overnight or rush delivery
  • Communicating all order status and delivery date changes promptly
  • Having a clear, easily visible return policy
  • Implementing a chargeback protection insurance solution that covers your business against chargeback costs

How Can Merchants Make the Chargeback Process Go Smoothly?

If you find yourself in the middle of a chargeback dispute, how can you ensure the process goes smoothly?

  • Carefully review the chargeback documentation that will be accepted, and follow those guidelines.
  • Ensure your record-keeping system is organized and reliable. Because cardholders have up to two years to file a dispute, merchants must keep order documentation and communications on file at least this long.
  • Ensure all documentation is in English or has an English translation.
  • Respond quickly — the time limits for submitting documentation and a defense are usually only a matter of days.


In card-not-present transactions, merchants alone bear the brunt of chargebacks, so it’s important to be prepared — and protected. E-commerce survival means minimizing fraud losses while successfully processing legitimate sales; a solid risk management solution can help you do just that.

Contact us today to learn more about how ClearSale’s Chargeback Protection Insurance solution can help you increase your revenue, let you approve more orders and guarantee you’ll never again pay for chargebacks.

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