What is a Provisional Credit? How Can You Secure a Provisional Credit Reversal?
Ever waited longer than usual for a transaction to be verified, or had to get a transaction reversed? If so, you might have seen provisional credit show up on your statement.
Provisional credits are a common occurrence. However, they can do a lot of damage to businesses if they’re issued inaccurately.
In this post, we’ll examine what is a provisional credit and why banks issue them. We’ll also see how they impact both cardholders and merchants.
What is a Provisional Credit?
A provisional credit is a temporary credit issued by a bank to an account holder. This statement item can later be reversed, or made permanent, depending on the reason for the credit issuance.
Banks may issue a credit to an account holder at their discretion. The credit will then appear on the cardholder’s statement as its own distinct line item. The entry on the cardholder’s statement will note that it’s a credit, but it may not always explain the reason in detail.
If cardholders are confused about the source of a provisional credit, they can usually contact the bank to get more information. Their issuing bank will be able to divulge the details of the credit, including where it came from, why it was issued, and how long it will take before the provisional credit becomes permanent.
Why Do Banks Issue Provisional Credits?
There are a few reasons why a bank might offer a provisional credit to a cardholder.
In some cases, it could be because a transaction has not yet been verified. If that’s the case, then the credit would work like a placeholder until the transaction is settled. Most often, though, banks issue provisional credits as part of the transaction dispute—or chargeback—process.
How Do Provisional Credits Hurt Merchants?
Simply put: every provisional credit issued to a cardholder will ultimately come out of a merchant’s pocket.
When a cardholder’s bank (known as the issuer) provides a credit, those funds come out of the bank’s own reserves. It’s up to the issuer to recover their money from the merchant’s bank (known as the acquirer). The acquirer turns around and pulls their money from the merchant’s bank account.
The merchant is responsible for more than just the transaction amount, though. They also get hit with a chargeback fee, which covers the acquirer’s administration costs resulting from the chargeback. The merchant also loses out on the cost of any merchandise shipped, plus overhead fees like shipping and logistics.
Can Merchants Reverse Provisional Credits?
Of course. These statement credits are not final…after all, that’s what makes them “provisional.”
After a cardholder files a dispute, the merchant has two options. They can ignore it, and let the chargeback proceed. In this case, they’d lose the dispute automatically, and the provisional credit would become a permanent reversal of funds.
The second option is to fight the chargebacks, and attempt to secure a provisional credit reversal if they merchant believes the cardholder’s claim is invalid. This can be accomplished through a process called representment.
With representment, the merchant literally “re-presents” the charge to the issuing bank. Of course, it would be pointless to represent the charge without any additional information; it would simply be rejected again. For representment, the merchant must also include compelling evidence which demonstrates that the original transaction was valid and should be upheld.