Banking Category Banking: the easy, simple banking guide

How Do Banks Handle Credit Card Fraud?

Credit card fraud is usually discovered when a cardholder notifies his bank of charges on the statement that he did not make. Credit card bank officials in the fraud department initiate an investigation into the matter and sometimes block the account to prevent further fraudulent activity. If the transaction is discovered to be fraudulent, the matter is reported to authorities and the merchant bank is contacted for reimbursement of the charges.

The Investigation

When a cardholder notifies his credit card bank of fraudulent transactions, the bank will initiate an investigation by ordering copies of the credit card receipts from the merchant. The receipts are examined for evidence of fraud, such as mismatched signatures. If bank officials deem that the transaction is not fraudulent, the cardholder is notified of his responsibility to pay the charge.


If the transaction is found to be fraudulent, the cardholder bank will initiate an investigation to determine if the transaction was properly authorised by the merchant. If there is evidence of an improper authorisation, the cardholder bank will initiate a chargeback. A chargeback is a reversal of the transaction back to the merchant bank. The merchant bank will refund the cardholder bank, and charge the merchant a fee in addition to removing the amount of the transaction from the merchant's deposit account.

The Cardholder Bank's Liability

If the merchant is found to have performed the transaction correctly, the cardholder bank will absorb the loss. Most cardholder banks maintain a zero-liability policy, meaning that a cardholder will not be held responsible for fraudulent charges on his credit card.

The Merchant Bank's Liability

When a transaction is improperly executed, the merchant bank will withdraw the amount of the transaction from the merchant's account, plus a chargeback fee. However, it sometimes happens that the merchant does not have enough in his account to cover the charges. The merchant bank must decide whether to suspend the merchant's account or allow the merchant to continue doing business to recoup the loss. Often, a merchant bank will suspend a merchant's account and absorb the loss.

Punishing the Culprits

Finding the guilty party in credit card fraud can be difficult. In some cases, the cardholder's family or friend is the culprit. In other cases, an employee at the merchant is guilty of collecting the magnetic data on a credit card for fraudulent use. Often, credit card fraud can be tied to organised crime. In cases of significant financial loss, banks work with the Secret Service, FBI, and local authorities to capture and punish the culprits.