How Do Banks Investigate Fraud?

While it may not always seem like it from the merchant’s perspective, banks do actually investigate fraud claims as a part of the process of filing a chargeback. As a process that begins with an interaction between a cardholder and their issuing bank and is conducted by that bank’s investigators, it may seem to merchants like an especially opaque part of the chargeback process. This article answers some frequently asked questions about bank fraud investigations.

What Initiates a Fraud Investigation?

A fraud investigation begins with the cardholder contacting their issuing bank to dispute a charge. While cardholders are ostensibly expected to try to resolve the dispute with the merchant before contacting the bank, that is not always the case. The cardholder informs their bank that they believe a transaction was fraudulent, and the bank begins the process of conducting an investigation.

Who Conducts a Bank Fraud Investigation?

The cardholder’s issuing bank conducts the investigation when the cardholder alleges fraud. Banks have dedicated fraud experts who conduct these investigations, gathering information from all of the other parties in the process—cardholder, merchant, and acquiring bank.

What Happens In a Bank Fraud Investigation?

Once a bank has made the decision to investigate a fraud claim, they examine different evidence, depending on the nature of the claim. If the cardholder is claiming that somebody fraudulently made the transaction with their payment information, the investigator might look at transaction data such as IP addresses and time and location data for the transaction. If the cardholder is claiming that the merchant perpetrated the fraud, the bank investigator may request additional, specific information from the merchant or acquirer.

If the bank investigator finds evidence to substantiate the cardholder’s claims—or perhaps merely if they do not find any evidence to refute the claims—the investigator files a chargeback, beginning the chargeback process in earnest. Experienced bank investigators may be able to recognize when a cardholder has errantly (or fraudulently) filed a dispute on a legitimate transaction and opt not to file a chargeback but bank policies and chargeback laws generally give more leeway to cardholder claims.

In rare circumstances, the investigator may find evidence of larger-scale criminal fraud and opt to refer the case to the FBI.

Who Decides What the Ultimate Result Is?

If the bank investigator does indeed decide to file a chargeback, that leaves the merchant with a decision: whether to accept the chargeback or fight it. If the merchant opts to fight the chargeback, that creates a multi-stage decision tree for the merchant, acquirer, and issuer. If the chargeback process is seen through to the end, the ultimate decision will be made by the card brand at arbitration.

What Are the Time Limits for a Bank Fraud Investigation?

Legally, banks are required to allow cardholders to dispute transactions until 60 days after the initial transaction. Most issuers opt to double this and give cardholders a 120 day time limit. Once the cardholder contacts the issuing bank to dispute the charge, they have 10 days to investigate the dispute and decide whether or not to escalate it to a chargeback. If the investigator does determine that a chargeback should be filed, that sets off the chargeback process, which has its own time limits for each stage.

What Happens to the Payment During a Bank Fraud Investigation?

The issuing bank usually issues a provisional credit to the consumer at the outset of the chargeback process. The bank later recoups that payment from the merchant. If the merchant fights the chargeback, the payment can change hands again, depending on the ultimate outcome.

How Can I Ensure that a Bank Fraud Investigation Results In a Favorable Decision?

Merchants generally do not play an active role in the bank fraud investigation portion of the payment dispute process. The only real way a merchant can influence the outcome of a bank fraud investigation is if the investigator requests information from the merchant and the merchant is able to provide evidence dispelling the cardholder’s fraud claim. And even that is a necessarily responsive act rather than an active one.

The best strategy to ensure a favorable outcome in a bank fraud investigation is to prevent that investigation from occurring in the first place. Merchants would be well served to engage in preventative tactics such as employing fraud prevention techniques and technology, emphasizing excellent customer service, and making sure that cardholders can easily contact you before contacting their bank if there is a charge on their billing statement that they don’t recognize.