Debit vs. Credit Chargebacks

Table of Contents

1. What Are Chargebacks and Disputes?
2. The Evolution of Chargebacks in the Age of Digital Payments
3. How Do You File a Debit Card Chargeback?
4. Why Do Debit Card Chargebacks Happen?
5. What's the Difference Between Credit and Debit Card Chargebacks?
6. What's the Best Way to Fight Debit Card Chargebacks?
7. How Can Merchants Prevent Debit Card Chargebacks?
8. Why Are Debit Card Chargebacks More Difficult for Cardholders?
9. How Many Days Do Cardholders Have to File a Debit Card Chargeback?

Chargebacks were originally created in the United States by the Fair Credit Billing Act of 1974, which gave customers the right to dispute mistakes and incorrect charges on their credit card accounts. However, the right to file a chargeback for a debit card transaction wasn't established until the Electronic Funds Transfer Act of 1978. While only four years apart, the two laws have slightly different requirements. Because of this, there are still differences between credit card and debit card chargebacks to this day.

In order to effectively protect their revenue from the costs of chargebacks, it's important for merchants to have a complete understanding of the systems and processes involved. Let's discuss the ins and outs of debit card chargebacks and go over the differences between chargebacks for credit card purchases and those for debit cards.

With credit cards, this credit is usually processed immediately. Since the balance on a credit card is simply the issuer's own record of how much the cardholder owes, that record can be easily updated.

For debit cards, on the other hand, changing the account balance requires actually moving funds into the account, which means it can sometimes take a few days for the credit to show up.

When a chargeback is filed, the merchant is notified through their acquirer and the transaction amount is debited from the merchant's account along with a chargeback fee. The merchant can then respond by either accepting the chargeback or fighting it. If they fight the chargeback and win, the cardholder's temporary credit will be reversed and the funds will be returned to the merchant. If they accept the charge or lose the dispute, the credit will become permanent.

Most merchants will offer a refund if there was a problem with a purchase, and getting a refund is much faster than going through the chargeback process. If a chargeback is necessary, however, the issuing bank will take over. The bank will ask for details about the transaction and why the customer wants to dispute it. If their reason for disputing the charge is approved, the bank will file a chargeback.

Sometimes this happens because another authorized user on the account made the purchase. It can also be the result of a recurring charge the customer forgot about or a bad merchant descriptor that doesn't match the customer-facing name of the business.

Some customers may also dispute a charge simply because they're dissatisfied with their purchase. This is not a legitimate reason for filing a chargeback. Unfortunately, the line between customer dissatisfaction and the product not being as described is a fuzzy one, so banks may sometimes grant these chargebacks anyway.

Credit cards generally cap cardholder liability at $50, with many banks offering zero-liability cards that reimburse cardholders for the full amount of fraudulent charges. Even though the rules for debit card chargebacks are slightly more recent, they might seem more outdated than those for credit cards.

Legally, the maximum liability for a debit card user is only capped at $50 if the card is reported lost within two days. If reported lost after more than two days but less than 60 days, the cap is $500. After that, there is no liability limit. As you might imagine, this gets a bit confusing when it comes to e-commerce fraud, since the card might not be lost at all.

This is one of the reasons why customers are often advised not to use debit cards for "risky" purchases like e-commerce transactions, situations where the card is taken out of the customer's sight (like restaurants), and instances where the products or services are delivered long after the card is charged and the time to dispute the transaction may have already expired

In the interest of better serving their customers, however, many banks offer their own protections and liability limits that go beyond what is legally required. Even banks that don't have specific protections in place will often choose not to hold the cardholder liable when they could legally do so.

Another major difference is that a debit card transaction takes cash directly out of the cardholder's bank account, while a credit card transaction merely registers a debt that the cardholder has agreed to pay back to their issuing bank.

As such, it's easy for credit card customers to see the problem as less urgent and contact their bank to deal with the issue rather than trying to come to a solution with the merchant. When a fraudulent or problematic transaction hits a debit card account, the cardholder is immediately out real money. Therefore, they may be more motivated to negotiate with the merchant directly to get a refund as quickly as possible. The chargeback process, even if it's resolved in the cardholder's favor, won't get them their money back as fast as a merchant-authorized refund.

To break everything down concisely, here’s an overview of the ways in which debit card chargeback disputes and credit card chargeback disputes compare:

Knowing that both types of chargeback disputes still come with their fair share of headaches, let’s focus on some proactive steps merchants can take to better avoid and fight chargebacks.

That's often easier said than done, however, as the details of what evidence will be seen as compelling and how the representment package must be put together for the best chance of success can be difficult to discern. That's why many merchants choose to outsource the job to a professional chargeback management company, which can fight chargebacks with a much higher success rate.