How Banks Handle Bank Fraud

The fraud investigation process

For merchants and customers concerned with financial crime and cyber security, bank fraud is a big problem. As such, it’s crucial to understand how banks investigate fraud and how you can prevent it. 

Let’s dive into it.

For merchants and customers concerned with financial crime and cyber security, bank fraud is a big problem

Types of fraud

Fraud is categorized into three broad categories including:

  • True fraud 

This is a classic scenario where a criminal illegally obtains the credit card number or an account holder’s credentials and makes a purchase.

  • Family fraud

This type of fraud involves a friend or a family member using a cardholder’s card without permission. The cardholder then files a dispute citing unauthorized transactions.  

  • Friendly fraud

The cardholder triggers this type of fraud. The cardholder then disputes the transaction and claims it’s a fake charge when it’s not. 

In the case of family and friendly fraud, the crime is against the vendor or merchant. However, with true fraud, the crime is against the cardholder.

The fraud investigation process

Banks investigate fraud in several steps and adhere to state, internal, and card provider regulations.  Many fraud investigations start at the request of the customer, whether that’s a business or an individual.

The fraud investigation process

The dispute by the customer leads the bank to start a fraud claim – a process that involves an in-depth investigation of the transaction and gathering relevant evidence to the claim.

After the bank sets up the fraud claim, it has a 10-day period within which they have to complete their investigations. If they need more time to reach a decision, they can ask for an extension of 45 days.  Despite the extension, the bank has to temporarily refund the customer the disputed amount by the 10th day.

To streamline the process and give customers a great experience, many banks automatically trigger the temporary credit as soon as the claim is filed.

Assessing evidence

At the heart of bank fraud investigations is the assessment of the evidence. 

The bank will start by inspecting the transaction for obvious fraud indicators. They’ll consider the following elements: 

  • Geo-location
  • Transaction timestamps
  • IP addresses at both ends of the transaction
  • Account activity
  • Behavioral indicators. Is the payment unusual given the customer’s spending pattern, or is it a payment they’ve made before?
  • Other elements indicating that the cardholder didn’t authorize the transaction

Ideally, a bank should unearth friendly fraud when it happens since they are trained to identify common scenarios, including;

  • In-app purchase made by unsupervised kids
  • Forgetting to cancel an account before the trial period ends

In friendly fraud, the bank might not notify authorities of fraud. But in true fraud, they often notify law enforcement like the FBI. Regardless of the fraud type, the bank reserves the right to report the case to law enforcement or not. 

The bank requires the customer to provide evidence for their fraud claim. Evidence can include proof of their whereabouts when the transaction was completed and any documentation that shows the transaction is false.

Returning money to the customer

If the bank proves there’s fraud and you did nothing to compromise your account’s security, they’ll return the money. Returning the funds might take a couple of days, depending on how long the investigation takes.

Returning money to the customer

But if the bank investigation shows negligence on your end, you might be liable for part or all the loss.

In cases of identity fraud, the victim has to contact the credit bureaus and set up a fraud alert on their credit reports. Identity fraud that leads to long-standing fraud damages a customer’s credit report, which might take years to repair. Therefore, customers are encouraged to monitor their reports regularly.

Debit vs. credit cards

Fraud liability in debit and credit cards are different.

The federal Fair Credit Billing Act dictates credit card liability. If a customer’s card is stolen, they are only liable for up to $50 of the fraud charges. If your credit card number is stolen, but not the card, the customer is not liable for unauthorized use. Instead, the merchant will refund the transaction amount to the cardholder and pay the chargeback fee.

Debit cards are regulated in the U.S. by the Electronic Fund Transfer Act. If a customer loses their card and reports the fraud within two business days, their maximum liability is $50 or the amount of the fraudulent transaction (whichever smaller). But if they take more than two business days to report the fraud, their liability increases to $500. If the customer reports the fraud after 60 days, they are liable for the whole amount transacted until the bank was notified.

For unauthorized transfers not involving card or device loss, filing a report within 60 days shields the customer from  liability. But after 60 days pass, a customer faces unlimited liability.

Despite the terms set by regulation, many banks offer zero-liability credit and debit cards that limit liability for losses due to unauthorized transactions in most instances. However, it is worth reading the fine print to understand the exceptions to these policies.

Chargeback representment

Chargebacks due to unauthorized transactions cost merchants a lot of cash in reversed revenue and fees every year. Bank fraud investigations often side with the customer to the merchant’s detriment.  

Some merchants opt to go to chargeback representment to fight these cases and recapture earned revenue. If the bank upholds the fraud claim, the merchant can represent the chargeback to the bank  with fresh evidence to dispute the initial findings.

If the merchant can prove the fraud claims were false, they can get their cash back. Unfortunately, this process can take up to 120 days and is resource intensive.

To improve your chances of recovering lost revenue, eliminate the time and resources spent on the chargeback process and regain focus on your business, contact us at Justt.

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