Chargeback Management

How Banks Conduct Transaction Fraud Investigations

bank fraud investigation

Table of Contents

  1. What are Different Types of Fraud?
  2. What Happens When a Bank Gets a Fraud Claim?
  3. What Does the Bank’s Investigation Entail?
  4. Conclusion
  5. Frequently Asked Questions

Merchants and consumers are at odds with each other when payment disputes occur, but there is one thing they can agree on: the banks’ process for investigating fraud claims can be mystifying and frustrating. Consumers wonder why it takes so long for banks to return their money when they’re the victims of obvious crime.

Merchants wonder if banks vet dubious fraud claims at all. Of course, fraud is a serious problem for banks too, and there are rules they must follow when it comes to handling unauthorized transactions. When a bank receives a claim of payment card fraud, what do they really do to investigate it?

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One problem is that banks, consumers, and merchants don’t always speak the same language when it comes to fraud. For consumers, fraud can be a catch-all term that refers to a wide range of complaints or issues they may have with transactions, many of which might not fall under the legal definition of fraud. In the realm of merchant chargebacks, we talk about “true fraud” and “friendly fraud,” two very different things that aren’t as closely related as their descriptors might suggest.

Untangling the many varieties of fraud can get complicated, especially when merchants are trying to make sense of their chargeback data for analytic purposes. It can be helpful to know how fraud claims are handled on the bank’s end, and what to expect in terms of timelines and actions they are likely to take.

What are Different Types of Fraud?

Before we go further, let’s review some fraud terminology:

  • True fraud is when a fraudster steals a cardholder’s payment card credentials and uses it to make a purchase without their knowledge or permission.

  • Friendly fraud, also known as chargeback fraud or credit card dispute fraud, is when a cardholder disputes a transaction and receives a chargeback based on false claims.

  • Family fraud is when someone known to the cardholder uses their card without permission, and the cardholder disputes the charge as an unauthorized transaction.

  • A dispute is the term for when a cardholder asks their bank for a chargeback on a transaction that they did authorize, Disputes are not to be granted for any type of consumer complaint, but only for very specific cases where the merchant has made a billing error or failed to uphold their terms of purchase with the cardholder.

Note that in the case of true fraud, the cardholder is the victim, whereas in the case of friendly and family fraud, the cardholder is actually defrauding the merchant.

What Happens When a Bank Gets a Fraud Claim?

The first thing the bank will do is try to substantiate that fraud has actually occurred. They will ask the cardholder bringing the fraud claim to provide additional details or documentation about the transaction.

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyFor cardholders who really have been victimized by fraudsters, this can feel like a big ask. It’s often the case that after a cardholder first notices fraud on their account, they discover that it has been going on for quite some time—small card testing purchases, easy to overlook, often accumulate before the fraudster goes for a big payout. Researching and documenting all of these transactions to satisfy the bank can be a lot of work, but it’s worth it—the Fair Credit Billing Act caps consumer fraud liability at $50.

Per the Electronic Fund Transfer Act, cardholders are required to notify banks about fraudulent charges within 60 days of the transaction—any later and the bank is not obligated to respond.

Once notified, the bank has 10 business days to investigate the claim and reach a decision. If they find that fraud did indeed occur, they are obligated to refund the cardholder.

If the bank needs more time to investigate, they can take up to 45 days, but they must at least temporarily return the funds to the cardholder’s account by the 10-day deadline. Many banks streamline this process by granting a provisional credit as soon as a dispute is filed.

What Does the Bank’s Investigation Entail?

Bank investigators will usually start with the transaction data and look for likely indicators of fraud. Timestamps, geolocation, IP addresses, and other elements can be used to prove whether or not the cardholder was involved in the transaction.

When the cardholder is claiming that the merchant defrauded them in some way, the bank may put out an inquiry for more information.

Merchants should always be on the lookout for these; any inquiry that can be adequately addressed is a chargeback prevented.

Ideally, bank investigators will uncover friendly fraud when it occurs, as they will be trained to identify common scenarios (such as when the free trial period ending and regular billing kicks in, the in-app purchases made by the unsupervised child, and so on). As merchants know, this doesn’t always happen. Friendly fraud chargebacks are a huge problem for merchants, who have to take it upon themselves to provide the evidence that refutes these claims.

Banks may choose to notify law enforcement, such as the FBI, when they feel a fraud case warrants it.

How Do Victims and Merchants Get Their Money Back?

Once a fraud investigation winds down and the victims are satisfied, it's time for the funds to be returned. 

During the normal chargeback process, where a transaction is found to be fraudulent, then the issuing bank immediately and provisionally refunds that customer's money. If the merchant successfully disputes that chargeback, then the money is simply returned. In either case, the money is moved back and forth between banks and the merchant. Unlike having a physical object stolen, the money isn't just gone. 

However, depending on the type of fraud, it can be much harder to get their funds back from a chargeback in cases of friendly fraud. These types of fraud are harder to prove during the chargeback process, so it may be the cases that the fight could take a while. 

If a merchant is facing chargeback fraud case, they have to work through the dispute process through representment, which means that they must re-present the transaction and provide additional evidence as to why the transaction was legitimate--that is, not the result of fraud. 

Within that framework, if the merchant can prove to the issuing bank that they are processing a legit transaction, they can get their money back. 

However, if that merchant cannot prove that friendly fraud has occurred, then they don't get the money back and lose the transaction revenue. 

In either case, the final decision falls upon the issuing bank. The evidence provided by the merchant must speak to them in order to be successful. 

Conclusion

Several different laws and regulations define the chargeback process, and these laws were written to address various concerns over the course of decades—they don’t really add up to a cohesive, internally consistent whole that treats every stakeholder equally.

With merchants carrying the ultimate liability for the cost of chargebacks, banks aren’t really incentivized to investigate fraud in great depth or push back too hard against their customers’ claims. This might not be fair, but it clearly highlights how important it is for merchants to take charge of their own defense when it comes to fraud and chargebacks.

Fighting chargebacks is a battle with two fronts. Not only do merchants have to preemptively defend themselves and their customers against true fraud, they must also fight friendly fraud chargebacks after they’ve been filed by engaging in the representment process and supplying the banks with the evidence that shows that they were wrong to take their customer’s claims at face value.

FAQ

Ho long does a bank fraud investigation take?

Typically bank fraud investigations take up to 45 days.

 

Do banks press charges for fraud?

Yes, and fraud charges of sufficient scale can result in state or federal charges and time in jail.

 

Do banks really investigate disputes?

Yes. They do so as a protection service for their customers so that they don’t have to worry about the ever-increasing sophistication of fraud.

 

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