What is a payment dispute?

A payment dispute happens when a customer challenges a transaction, prompting the issuing bank to investigate the claim. If unresolved, the dispute may escalate into a chargeback, potentially reversing the payment, imposing fees on the merchant. According to the 2023 Justt Chargeback Pulse Report, businesses lose an estimated 1% of revenue to payment disputes annually, with some merchants reporting losses exceeding $5 million per year.

Common reasons for filing disputes include unauthorized transactions, often caused by fraud, where card details are used without consent. Another frequent reason is the non-delivery of goods or services, where customers don't receive what they paid for. Disputes may also occur when items or services are defective, damaged, or not as described.

In this article, we'll explore the impact of payment disputes on merchants, why they happen and how Checkout.com's solutions can help you manage and resolve them effectively.

What does 'dispute payment' mean?

The term 'dispute payment' refers to the formal process initiated when a customer questions a transaction—this can often be due to suspected fraud, billing errors, or dissatisfaction with goods or services. When a customer flags an issue with their card issuer, the issuer investigates and decides whether to reverse the transaction.

For merchants, payment disputes can be costly and complex, leading to lost revenue, chargeback fees, disrupted cash flow, and strained customer relationships. This is especially challenging in high-risk industries where disputes are more frequent.

Preventing disputes before they escalate is important. Businesses can reduce the occurrence and impact of payment disputes by implementing clear refund policies, robust fraud prevention measures, and proactive customer communication. Doing so can help maintain operational efficiency and strengthen customer trust.

Who is involved in a payment dispute?

Several parties play a role in a payment dispute:

• The customer - the cardholder who raises a dispute over a transaction
• The merchant - the business that sold the goods or services being disputed
• The payment processor - the provider that facilitates communication and data transfer between parties involved in the dispute
• The acquirer - the bank or payment service provider that processes payments on the merchant's behalf
• The issuer - the bank that issued the customer's payment card and reviews the dispute
• ‍The card network - the card brands (e.g., Visa, Mastercard) that oversee the dispute process

Each stakeholder plays a role in ensuring that the dispute is resolved efficiently.

How does the payment dispute process work?

While the exact process varies by card network, most disputes follow these steps:

1. The customer reports an issue about a specific transaction to their bank, initiating a transaction dispute. The bank or issuer then assigns it a chargeback code, which describes why they are reversing the payment.
2. Your business investigates the transaction to find out why the customer raised a dispute. This may involve reviewing transaction records, communicating with the customer, or gathering other documentation.
3. You respond to the payment dispute evidence to support the transaction's validity, such as proof of delivery or communication records.
4. The bank or card issuer reviews the documentation provided by you and the customer to make a decision. If the evidence supports the merchant's case, the transaction amount is returned to the merchant. If it doesn't, the cardholder retains the transaction amount.
5. If the transaction is upheld, the funds are released to your business account. If the customer's claim is successful, the bank reverses the transaction. Disputes may go through multiple stages, including reviews and evidence submissions, before reaching arbitration, where the card scheme makes the final decision. You may also face penalties, such as chargeback fees.

What happens if you dispute a charge?

The dispute resolution process is designed to protect customers, often making it difficult for merchants to achieve a favorable outcome. To contest a chargeback, merchants must provide compelling evidence, such as proof of delivery or communication records.

The acquirer submits this evidence to the issuing bank, which evaluates the case and decides whether to reverse the chargeback in favor of the merchant or uphold it for the customer. If the merchant's evidence is accepted, funds are restored to their account. However, if the case isn't resolved in the merchant's favor, they may face additional chargeback fees and lose the transaction amount.

How can disputes impact merchants?

Payment disputes are costly and disruptive, especially for merchants in high-risk industries where chargeback rates are higher. Beyond losing sales, disputes result in chargeback fees, higher processing costs, and the risk of penalties from acquirers. They also strain internal resources, disrupt cash flow, and damage customer relationships.

To minimize these risks, explore our guide on 10 ways to prevent chargebacks.

Difference between legitimate and illegitimate disputes

A legitimate reason for a customer to file a payment dispute is suspected fraud. This could involve a criminal making an unauthorized transaction using their card details or a merchant deliberately attempting to scam the cardholder. It might also occur if the merchant fails to meet their obligations, such as fulfilling an order of goods.

An illegitimate dispute, also known as friendly fraud, occurs when a customer either deliberately or inadvertently claims a transaction is invalid. This type of disputed payment might happen because the customer has genuinely forgotten making the purchase or is attempting to get something for free by claiming that an order never arrived when it actually did.

To combat friendly fraud, businesses can use tools like Visa Compelling Evidence 3.0 (CE3.0), which Checkout.com offers to help merchants fight these types of disputes effectively. CE3.0 enables merchants to present strong evidence to resolve claims in their favor, reducing revenue loss and improving efficiency.

How to fight disputes with Checkout.com

Checkout.com's Rapid Dispute Resolution (RDR), in partnership with Verifi, enables merchants to resolve disputes automatically before they escalate into chargebacks. By addressing disputes during the pre-chargeback phase, RDR helps you avoid financial penalties, maintain a low chargeback ratio, and reduce operational overheads.

How does it work?

You have the flexibility to define custom rules for dispute resolution. When a customer challenges a transaction that matches your criteria, the system automatically issues a credit at the pre-dispute stage. This not only prevents disputes from counting toward your chargeback ratio but also strengthens customer relationships by resolving issues quickly and efficiently.

Key benefits include:

• Automation - RDR rules run automatically, reducing your need to process refunds or represent disputes manually
• Flexibility - customizable rules give you additional control over your dispute strategy
• Improved customer satisfaction - faster resolution times lead to better customer experiences
• Ease of integration - if you're already using Checkout.com's acquiring services, no additional integration is required
  ‍

Contact our team to explore how Checkout.com can help your business manage disputes efficiently and protect your revenue.