How Payment Disputes Work

Accepting card payments comes with the inherent risk of payment disputes, commonly known as chargebacks. It’s important for businesses to understand how the dispute process works and which parties are involved.

What is a Payment Dispute? #

A payment dispute, or chargeback, occurs when a cardholder files a claim with their card-issuing bank to request a reversal of a charge. Disputes are a core part of the card networks (Visa, Mastercard, American Express, and JCB) and exist to protect buyers from unauthorized or problematic transactions.

Cardholders may dispute a transaction for various reasons, including:

• Fraudulent activity – The buyer’s card details were stolen and used to make unauthorized payments.
• Goods or services not received – The buyer made a purchase but never received what they paid for. Example: An online order was placed, but the items were never delivered.
• Goods or services not as described – The received product or service was incorrect or of lower quality than expected. Example: A contractor was paid to build a patio, but the work was poorly done or not as agreed upon.

Who is Involved in the Dispute Process? #

Several key parties participate in the dispute resolution process:

• The card networks (Visa, Mastercard, American Express, JCB)
• The merchant (the business that accepted the payment)
• The buyer (also known as the customer or cardholder)
• The buyer’s card-issuing bank
• The payment processor (the platform or service that facilitated the transaction)
• Acquiring and banking partners (institutions that help process and settle payments)

Although specific steps may vary slightly between card networks, the general dispute process follows similar guidelines.

How Does the Dispute Process Work? #

1. A chargeback is initiated – The cardholder contacts their issuing bank to dispute a charge. The bank then starts the official dispute process.
2. The issuing bank notifies the payment processor – The payment processor (which handled the original transaction) is informed of the dispute and, in turn, notifies the merchant.
3. The disputed amount is frozen – As soon as a dispute is initiated, the payment processor will place a temporary hold on the disputed funds in the merchant’s account until the case is resolved. This ensures that if the dispute is decided in favor of the cardholder, the funds are available for reimbursement.
4. Merchant response window – The merchant is given a limited timeframe (usually around 14 days, depending on the card network) to submit evidence supporting their case.
5. Evidence review – If the merchant submits documentation, the payment processor forwards it to the issuing bank for review. The issuing bank typically takes up to 90 days to assess the case and make a decision.

Timeline for Resolution #

• If no evidence is provided by the merchant within the given timeframe, the dispute is typically decided in favor of the cardholder, and the frozen funds will be permanently debited from the merchant’s account.
• If the merchant submits evidence, the issuing bank reviews the case and determines the final outcome. If the merchant wins the dispute, the held funds will be released back to their account.
• The payment processor updates the merchant on the dispute’s status as soon as the bank provides a resolution.

Final Decision #

Once the cardholder’s bank makes a decision, it is final. The payment processor and merchant must abide by the outcome, and no further escalation is possible. While merchants can strengthen their case by providing solid evidence, the resolution is ultimately determined by the cardholder’s bank.

For more details on handling disputes and best practices for avoiding chargebacks, refer to your payment processor’s dispute resolution resources.