Who Pays When You Dispute a Charge?
Who pays when you dispute a charge? Explore the financial flow, from initial credits to the final responsibility for funds.
When a charge appears on a statement that seems incorrect or unauthorized, consumers have the option to dispute it. This mechanism allows individuals to challenge transactions for reasons like items not received, services not rendered, or unfamiliar activity indicating fraud. Disputing charges protects consumers from billing errors and unauthorized financial activity, providing a pathway to address discrepancies directly with their financial institution.
Initial Financial Flow and Provisional Credit
In a typical transaction, money flows from the consumer’s account, through financial intermediaries, and ultimately to the merchant’s account. The consumer initiates a purchase, their issuing bank approves it, and funds transfer to the acquiring bank, which deposits them into the merchant’s account. When a consumer disputes a charge, the immediate financial impact involves a mechanism known as “provisional credit.”
Provisional credit is a temporary credit applied to the consumer’s account by their issuing bank for the disputed amount. This credit is provided while the bank investigates the claim, ensuring the consumer has access to the funds during the process. It is important to understand that this credit is not a final resolution; it is conditional and subject to reversal depending on the outcome of the dispute investigation. At this stage, the merchant typically retains the original transaction funds, as the provisional credit comes from the consumer’s bank, not directly from the merchant.
The Chargeback Process and Investigation
After a consumer initiates a dispute and potentially receives a provisional credit, the formal chargeback process begins. The consumer’s issuing bank communicates the dispute to the merchant’s acquiring bank, often through a credit card network like Visa or Mastercard. The acquiring bank then notifies the merchant, providing a reason code explaining the challenge. This allows the merchant to respond.
Merchants are given a limited timeframe, typically 7 to 45 days, to provide compelling evidence supporting the transaction’s legitimacy. This evidence can include:
Transaction receipts
Shipping records
Delivery confirmations
Customer communication logs
IP address information
Proof of customer usage
Both banks and card networks review the submitted evidence to determine the dispute’s validity. The entire chargeback process, from initiation to resolution, can take 75 to 120 days.
Final Financial Responsibility and Outcomes
The resolution of a charge dispute determines who bears financial responsibility. If the dispute favors the cardholder, the provisional credit becomes permanent. The merchant then bears the cost, and their account is debited. The cardholder is not responsible for paying the charge.
Conversely, if the investigation favors the merchant, the provisional credit is reversed. The disputed amount is debited back from the cardholder’s account, making them financially responsible for the original charge. While partial refunds or settlements can occur, the final determination assigns financial responsibility to either the merchant or the cardholder.
Merchant Costs of Disputed Charges
Even when a merchant successfully defends a disputed charge, they often incur various costs beyond the potential loss of the transaction amount. A significant financial burden for merchants comes from “chargeback fees,” which are imposed by their payment processors or acquiring banks for each dispute initiated. These fees typically range from $15 to $100 per case, though they can be higher for businesses deemed to be high-risk. These fees are usually non-refundable, meaning merchants still pay them even if they win the dispute.
In addition to these direct fees, merchants face considerable operational costs. Responding to disputes requires time and resources for gathering evidence, communicating with banks, and managing the process. This diverts staff from other business activities. A high volume of chargebacks can negatively impact a merchant’s relationship with payment processors and card networks, potentially leading to increased processing fees or account termination.