A provisional credit is a temporary refund credited to a cardholder’s account by a financial institution —a bank, debit, or credit card issuer—while they investigate a disputed transaction. Provisional credits are added to cardholders’ accounts when they report unauthorized charges or billing errors. The temporary credit becomes permanent if the investigation concludes in the account holder’s favor. However, if the investigation concludes against them, the provisional credit is reversed, and the funds are deducted.
When do banks issue provisional credit?
Banks will investigate a claim and issue a provisional credit to a customer’s credit or debit card for the following reasons:
- A transaction is reported by the customer as unauthorized
- The total amount of transaction is higher than what a cardholder agreed to
- A merchant made a mistake during a transaction process
- A merchant charged a subscription fee, even though the customer cancelled the service
How does the provisional credit work?
Provisional credit acts as a temporary refund (think of it like a placeholder) while the bank investigates the dispute. The process usually starts when a cardholder reports an issue to their bank. The bank investigates the claim and, if it appears valid, applies provisional credit to the cardholder’s account within the next 10 business days, usually equivalent to the disputed amount. If the investigation confirms the claim, the credit becomes permanent.
If the dispute concerns unauthorized transactions, the issuing bank may file a chargeback claim against the merchant through their acquiring bank, which deducts the amount in question from the merchant’s bank account.
The provisional credit process: Step-by-step
Since the chargeback process can take months, banks provide provisional credit to maintain customer satisfaction and ensure the account holder can continue using their debit or credit card during the investigation.
Here’s how the provisional credit process works:
Step 1: Identifying a disputed charge
The first step is recognizing a potentially fraudulent charge or transaction error. Cardholders should regularly monitor their account balance and promptly report suspicious activities to their banks—but financial institutions can also detect unusual account activity and flag it, potentially leading to a customer dispute of a charge.
Step 2: Performing an initial review
Once notified, the bank performs a preliminary review of the disputed transaction. They also verify that the cardholder’s claim was submitted within the time frame set by the card network to report suspicious, fraudulent, or erroneous charges.
Step 3: Issuing provisional credit
If the bank believes the claim is valid, it applies a provisional credit to the cardholder’s account. The amount of provisional credit applied is typically limited to the amount of the disputed transaction. The temporary credit ensures the account holder is not financially burdened while the investigation continues.
Step 4: Conducting a thorough investigation
The bank gathers and analyzes all relevant evidence. This step may require cooperation from both sides (cardholder and merchant) to provide additional details about the transaction (or transactions) in question.
Step 5: Resolving the dispute
After reviewing the evidence, the bank determines whether the charge was legitimate. If the bank establishes the cardholder was telling the truth when making their claim, the amount provisionally credited to their account becomes permanent, and the bank may initiate a chargeback to recover funds from the merchant. However, if the bank rules that the cardholder wasn’t truthful when they made their claim, the provisional credit gets reversed from their account.
How long does a provisional credit stay on the cardholder’s account?
A provisional credit remains on a customer’s account until the dispute investigation is resolved. The length of the dispute depends on factors such as the complexity of the case, the issuing bank’s policies, and the responsiveness of any other parties involved in the dispute.
Typically, transaction disputes are resolved within 30 to 60 days. However, the process can take up to six months in cases involving arbitration or more extensive investigation. Resolution may occur within a few business days for straightforward cases, such as clearly unauthorized activity.
While a provisional credit is in the account, it is available for the cardholder to use. However, the bank will reverse the credit if the investigation determines that the dispute was unfounded. And if the cardholder has spent over the credit limit, the provisional credit reversal may result in an overdraft or negative balance.
How does a provisional credit affect merchants?
When an issuing bank initiates an investigation of a disputed transaction, any merchant involved in the dispute, especially small business owners, could face significant financial and reputational consequences.
Businesses must stay up-to-date with how the dispute process works and how it can harm their operations. Seeking professional advice from experts, such as financial advisors, can help companies avoid undesired scenarios, such as:
Financial risks
If the bank rules in favor of the customer, the merchant is responsible for reimbursing the disputed amount and paying any associated fees from the chargeback process. Transaction disputes are especially risky for retailers; they can disrupt their operations and, in severe cases, lead to financial insecurity or bankruptcy.
If the merchant believes the cardholder’s claim is invalid, they can initiate a process called representment, which allows them to provide evidence supporting their case. Winning a chargeback dispute ensures provisional credit reversal from the cardholder’s account. However, merchants may still face challenges recovering their funds, even if they win, due to fees and other complications.
Additionally, companies that have been involved in many chargeback disputes may be required to hold extra money in case of a new investigation. Such a requirement can significantly affect a company’s cash flow and allocation of resources.
Reputational damage
Customers who are dissatisfied with a company’s service are less likely to do business with or purchase from them again. Satisfied customers are a company's biggest advocates and promoters. When they lose trust in a company, many will not hesitate to share a bad experience with their close or broader community online.
For example, chargeback disputes could make retaining and attracting new customers difficult. Responsive and professional customer service is paramount to building and maintaining good customer relationships.
FAQs about provisional credits
Can a bank issue a provisional credit to a cardholders’ savings account?
Yes, a provisional credit can be issued to savings or checking accounts. The issuing bank will apply a temporary credit equivalent to the disputed amount and make it available until the investigation concludes. However, specific terms may apply depending on the type of account and the financial institution’s dispute resolution policy.
Can a cardholder use a provisional credit during the dispute investigation?
Yes, provisional credit is available for use during the investigation. However, if the dispute is resolved against the cardholder, the credit will be reversed, and funds will be deducted from their account.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.