Card Disputes: The Silent Threat to Bank Revenue and Customer Loyalty

Card disputes are often the most stressful interactions customers have with their banks. They frequently stem from traumatic events like stolen wallets, phishing scams, or unauthorized online transactions. When customers file a dispute, they often find themselves navigating an opaque, bureaucratic process that intensifies their frustration and anger.

A June 2025 survey by Cornerstone Advisors, commissioned by Quavo, revealed the extent of this dissatisfaction. Led by Chief Research Officer Ron Shevlin, the study found that a significant 57% of 2,127 U.S. consumers rated their fraud resolution experience a C or lower.

How a bank handles fraud directly impacts customer trust. Poor handling can severely damage the relationship, but experts warn of an even more immediate risk: losing a credit card’s “top-of-wallet” status, which directly cuts into crucial interchange fee revenue from card spending.

The True Impact: Lost Spend, Not Closed Accounts

When financial institutions mishandle fraud incidents, customers rarely close their accounts entirely. Instead, they often relegate the problematic credit card to a backup role, shifting their everyday purchases to another issuer. Jennifer Lucas, EY Americas’ payments consulting leader, notes, “We see a top-of-wallet replacement. They may not close their credit account because it will impact their credit score, but they’ll go dormant.”

This subtle shift has profound implications. Inefficient dispute resolution processes have lasting effects, prompting customers to either switch primary payment methods or consider leaving their bank altogether. A Quavo survey of 1,000 cardholders indicated that approximately two-thirds would consider switching banks due to lengthy or complicated dispute resolution.

However, an “intent to exit” doesn’t always translate into account closures. Cornerstone Advisors’ June research confirms that poor dispute resolution is far more likely to reduce card usage than to prompt account closures. The study found that 21% to 29% of respondents who rated their fraud experience a D or F reported using the card less frequently, with 17% of those giving an F rating stopping usage completely. In contrast, only 2% to 7% of respondents with A or B ratings reported reduced card usage. Even among those with the worst experiences, only 13% of consumers who rated their fraud experience an F actually closed the card or account.

David Benavides, vice president of digital design and member experience at Alliant Credit Union, emphasizes the urgency: “The longer it takes for a dispute to get resolved and for a new card to get provided to members, the more likely it is that they’re just going to pull the next card out of their wallet start using that. So that’s what we’re really trying to focus on.”

Where Banking Relationships Falter

While laws and regulations dictate dispute procedures, customers already stressed by fraud or a missing paycheck are often pushed to their limit by drawn-out processes and minimal communication. Trace Fooshée, strategic advisor at Datos Insights, points out, “There’s a profound sense of betrayal… most consumers expect their bank to protect their money from being stolen. It’s hard to get past that as the number one irritant and cause for anguish.”

A pervasive lack of clear communication regarding dispute status, coupled with customers being repeatedly transferred between representatives, systematically erodes trust and heightens the risk of both top-of-wallet loss and potential churn.

Sara Seguin, principal advisor for fraud and identity risk at Alloy, describes a common scenario: “You call in and you have to reauthenticate, you talk to three different people before someone can help you. Your account’s in the negative, and no one can tell you when you’re going to get money and you have bills due.”

Adding to the complexity, multiple intermediaries are often involved. Shanthi Shanmugam, CEO of dispute automation platform Casap, notes that many institutions outsource the chargeback component of disputes to third-party processors, further obscuring visibility for customers into their case status.

Often, these breakdowns are rooted in technology. Customer friction frequently stems from outdated, fragmented platforms that fail to communicate effectively. Shanmugam highlights that at many banks, critical data—customer information, transaction histories, and merchant details—can be scattered across as many as 40 separate systems, leaving institutions without the technical capacity to consolidate this information.

These systemic failures rarely feel like isolated incidents to customers. They accumulate, transforming a moment of vulnerability into a lasting impression of whether their bank can truly be trusted when it matters most.

Transforming Disputes into a Retention Strategy

For banks and credit unions, dispute management can no longer be viewed merely as a back-office compliance task. To safeguard top-of-wallet status and crucial interchange revenue, financial institutions are beginning to redefine dispute processes as powerful retention engines, emphasizing speed, transparency, and personalization.

At Alliant Credit Union, this means drastically reducing the time it takes for members to recover after fraud. The credit union implemented a vendor-based dispute management platform, eliminating manual handoffs and allowing staff to manage both deposit and card disputes end-to-end. They are also planning to launch real-time digital card issuance for existing members, ensuring customers can continue transacting even if their physical card is compromised.

“It’s giving them transparency, setting expectations on process [through] open and honest communication,” says Benavides. Shanmugam concurs, noting that quick updates on resolution status are vital for retention and align with modern digital-first customer expectations. “We live in a world where people order pizza at Domino’s, and they know… when it’s going in the oven. That’s the level of visibility and transparency that customers have come to expect,” she explains.

Intriguingly, aggregating data from disparate systems to enhance fraud resolution presents a practical application for Artificial Intelligence (AI). Shanmugam points out that AI can embed investigative logic into dispute platforms, equipping frontline staff with advanced tools to evaluate claims more rigorously. It can guide them through customer history, transaction patterns, and the critical follow-up questions an experienced fraud investigator would ask. With AI, she states, “you can empower your team to be world-class fraud investigators… because that expertise can actually be in the platform versus needing to be in someone’s head. Most people outsource it because they are not sure how to handle it.” Agentic AI tools can even take action based on this logic, potentially automating credits to maintain compliance.

The Delicate Balancing Act

Disputes reside at a complex nexus of fraud prevention, regulatory compliance, and customer trust, making them inherently challenging to manage flawlessly. Financial institutions face simultaneous pressures to act swiftly and alleviate customer distress, all while protecting themselves from potential abuse.

“Friction is among the many concerns that FIs have about disputes,” says Fooshée. “It would be inaccurate to say, though, that FIs approach this in a binary manner, [for example] ‘we must completely eliminate friction’ or ‘we must maximize friction.’ It’s a balancing act.”

This inherent tension often explains why dispute experiences lag behind customer expectations, even with investments in new tools and processes. Many fraud teams prioritize controls, loss avoidance, and regulatory timelines, while the downstream effects on customer engagement and spending are harder to quantify in real time.

From the customer’s perspective, difficult moments in the fraud resolution process can severely strain their relationship with their financial institution. Fooshée acknowledges that FIs are aware of these risks, even if they don’t always dictate immediate decision-making. He describes an approach that “generally seeks to make it as easy for consumers as possible without making it so easy that it promotes frivolous, baseless or outright fraudulent claims.”

Source: thefinancialbrand.com