Consumer Protection in Payments: What Happens After You Report Fraud

Fraud in payment transactions has a unique and nasty twist. You discover an unfamiliar charge on your card, see a charge that you don't remember making, or get a notification at precisely the wrong moment. Fraud is extremely personal to you, yet fraud is much more than just a personal concern with regards to the greater economy.

An aspect of the economy that lies at the heart of payment fraud, from an economic standpoint, is the existence of information asymmetry, transaction costs, and trust. Payment networks, banks, merchants, consumers, and so on each have different information, and not all of that information is shared at the same time. When fraud takes place, it is expensive to resolve: verification, investigation, and enforcement all come at a cost of time and money - all of which results in less efficiency due to higher costs incurred through fees, stricter oversight of transactions, and ultimately, a decrease in operational efficiency within the entire financial system.

For these reasons, reporting incidents of fraud has importance beyond resolving a specific occurrence. By reporting their incident quickly, consumers help financial institutions to potentially save money, identify trends in fraudulent activity, and decrease exposure to systemic risk caused by fraudulent payments. Incident reports are used to provide signals to assist in stabilising payment networks that operate under the premise of trust in order for those networks to continue to operate. The entire process may feel as though it is somewhat of a “black-box” to consumers, but by learning what occurs and why, we can have a better understanding of how fraud occurs and where the delays and decisions arise from.

Payment Fraud and Why Reporting It Quickly Matters

In short, unauthorised transactions that leave your bank account or are charged to your credit card without your consent represent instances of payment fraud. Payment fraud can arise from stolen payment card information or taken over accounts or via scams that, through manipulation, cause individuals to take actions on their own.

When it comes to payment fraud reporting, timing matters a great deal more than people think. Most financial institutions have defined timelines for reporting for all disputes, and in those same situations, the timelines are typically short. Reporting suspicious activity ASAP is critical, because if it is reported quickly, there is a greater chance that additional transfers may be blocked, you will be able to trace where the funds have moved to and provide the necessary supporting information/evidence.

Timeliness of reporting matters systemically as well as in relation to individuals. The early identification of fraud will assist service providers to better identify patterns, discover newly developed tactics, and address weaknesses in their payment networks. In accordance with economic theory, reporting timely relative to the timing of the transaction will reduce the amount of uncertainty and will reduce the cost of resolving the fraud on a system-wide basis.

Consumer Protection Rules and Where They Apply

Customer protections, including withdrawal rights and refund protection laws, vary widely across countries and geographic regions and are often experienced unevenly by customers. Nevertheless, in many jurisdictions there exists an underlying principle that customers will not be held accountable for transactions that were not performed or authorised by them, provided they report the incident in a timely manner and adhere to the requisite processes.

Card purchase transactions typically provide well-established dispute resolution mechanisms, such as chargeback procedures, which enable customers to challenge transactions related to goods or services that were not delivered or payments that were clearly neither authorised nor intended. Many credit cards also provide purchase protection, depending on the issuer and the specific product.

Bank transfer transactions often involve a more complex analysis of transaction activity. For example, if an account is compromised and funds are transferred without the account holder’s consent, the transaction is typically treated as unauthorised. However, if the account holder is misled into initiating the transfer themselves, potentially as a result of deception or coercion, liability is often assessed differently than it would be in the absence of such factors. These distinctions illustrate how liability and refund decisions, and ultimately the risks associated with making payments, are allocated among financial services providers and the payment methods they make available to customers.

What Usually Happens After You Report Fraud

Providers typically respond with protective action, rather than taking an investigative approach. Accounts may be restricted, cards may be frozen or access may be restricted while they look at options to stop further loss. Some providers assess that the account activity was inappropriate and will automatically issue a replacement card, while others may require you to request one.

Once the risk has been contained, the review process can begin. Providers look at the transaction information, the account history and the payment method used to determine if they were properly processed. Was the transaction completed over the internet? Was the card used to complete the transaction present when it was made? Were the proper login credentials used? Did the behavior differ from how you typically use your account?

The biggest question asked during this stage of the process is, "Do credit card companies investigate?" Yes, they do. They will typically conduct a structured review if the dollar amount of the transaction is high, if the pattern of transactions appears to not match historical patterns, or if the transaction involves a complex dispute.

The Evidence You May Be Asked to Provide

Many people believe that financial institutions have full access to consumer databases, so they do not feel the need to provide details. However, according to most investigations of fraud cases, customer-provided information remains a significant component of investigations.

A strong fraud report is one that is clear, specific, and internally consistent. Dates, amounts, and timelines are important, as is the clarity with which each instance of fraudulent activity is described and the actions taken as a result of those observations.

Consumers should be contacted to provide details regarding transactions associated with the alleged fraud, including transaction details (date, time, etc.), screenshots, records of account activity, and all corresponding messages, emails, and/or phone calls related to the incident. Financial service providers may ask whether cards or devices associated with the account were lost or stolen, whether the account was shared, and how long the consumer has been aware of the fraud. All of this information reduces uncertainty in the investigation and speeds up resolution.

Refund Timelines and Possible Outcomes

The timeline for receiving a refund will vary depending on how you paid, the provider’s policies, and how complicated your case appears at first glance. Some disputes can be resolved very quickly (for example, when a transaction is still pending additional approval or for another valid reason and is already recorded on the account). Other disputes will take longer to resolve.

Refund timelines will also vary depending on the type of payment, particularly for debit or credit card transactions. In some cases, the issuer may provide a provisional refund while the dispute is under investigation. While this provisional credit may help ease the immediate burden caused by the temporary unavailability of funds, it is not a final determination. If a claim is subsequently denied, the provisional credit will be rescinded.

It is often very difficult to recover funds that have been transferred between multiple accounts, particularly when the transfers occur across different countries. In some cases, depending on the originating bank and jurisdiction, reimbursement programs may exist for this type of activity; however, eligibility for these programs typically depends on specific criteria being met.

In most cases, one of three outcomes will occur following the conclusion of a dispute: (1) the consumer receives a full refund due to confirmed unauthorised transactions; (2) the consumer receives a partial refund reflecting the amount for which they are responsible; or (3) the consumer receives a denial based on the provider determining that the payment was authorised.

Protecting Yourself While the Case Is Still Open

Although recovering payment from fraud is important, it is just as equally important to stop future occurrences of that same fraud. Some basic ways to prevent any future occurrence of fraud include (but are not limited to) changing passwords, modifying security settings, and avoiding the reuse of login information across different services. You must protect your email accounts especially, because anyone who has access to one of your email accounts will normally have the ability to use that access to reset your passwords in other areas.

Identity verification and know-your-customer (KYC) procedures can be used to help prevent fraud as well, in that a fraudster who has enough personal information to impersonate another person can use that impersonation in an attempt to circumvent your business's security measures, or create a new account in the name of their victim. To reduce this risk, all contact information must be up to date and multi-factor authentication must be enabled.

After a fraud incident, for at least some period of time, you should continue to review your accounts on a more frequent basis than you would normally. Typically, smaller test transactions may be conducted prior to larger fraud incidents. In these cases, a fraudster uses stolen personal information to attempt fraudulent activity across one or more payment methods.