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.

What Are Chargebacks and Disputes?

A chargeback (sometimes called a dispute) is the process initiated when a customer disputes a transaction through their personal bank. If the bank sees the reason for the dispute as valid, they will grant a chargeback and issue a temporary credit to the account.

New call-to-actionWith 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.


The Evolution of Chargebacks in the Age of Digital Payments

As technology continues to reshape the landscape of financial transactions, the world of chargebacks is also experiencing significant transformations. The traditional understanding of chargebacks primarily centered around credit and debit card transactions, but with the rise of digital payments and alternative financial technologies, new challenges and opportunities have emerged for both consumers and merchants.

Digital Wallets and Contactless Payments

One notable shift in the payment ecosystem is the widespread adoption of digital wallets and contactless payments. With the growing popularity of services like Apple Pay, Google Pay, and various other digital wallets, consumers now have additional layers of security and convenience. However, this shift also introduces novel considerations for chargeback scenarios.
Unlike traditional card transactions, digital wallets often link to various funding sources, including credit cards, debit cards, and bank accounts. Understanding the intricacies of chargebacks within these systems becomes crucial for merchants. The resolution processes, timelines, and liability structures may differ from those associated with physical card transactions.

Cryptocurrency and Chargeback Challenges

The advent of cryptocurrencies has introduced an entirely new dimension to the payment landscape. Bitcoin, Ethereum, and other cryptocurrencies operate on decentralized blockchain technology, offering a degree of anonymity and security. However, this very nature poses unique challenges when it comes to chargebacks.
Unlike traditional payment methods, cryptocurrency transactions are irreversible. Once a payment is made, it cannot be undone. This feature eliminates the possibility of traditional chargebacks but introduces a different set of considerations for merchants. Understanding the nuances of cryptocurrency transactions and implementing strategies to mitigate associated risks is becoming increasingly important.

Subscription Services and Recurring Payments

The subscription-based business model has gained tremendous momentum, offering convenience for consumers and a predictable revenue stream for merchants. However, this model also presents challenges related to chargebacks, particularly in the context of recurring payments.
Customers may forget about ongoing subscriptions or face difficulties in canceling them, leading to unintended chargebacks. Merchants need to implement clear communication strategies, providing customers with transparent information about subscription terms, billing cycles, and cancellation procedures. Proactive measures can significantly reduce the likelihood of chargebacks stemming from subscription services.

Artificial Intelligence and Fraud Prevention

As digital transactions evolve, so do the tools available for fraud prevention. Artificial intelligence (AI) and machine learning algorithms are increasingly being employed to analyze patterns, detect anomalies, and prevent fraudulent transactions. Merchants embracing these technologies can bolster their defenses against unauthorized transactions and potentially reduce the occurrence of chargebacks.
In conclusion, the landscape of chargebacks is evolving alongside advancements in payment technologies. Merchants must stay vigilant, adapting their strategies to navigate the complexities of digital wallets, cryptocurrency transactions, subscription services, and advanced fraud prevention mechanisms. By staying informed and implementing proactive measures, merchants can better protect their revenue in this dynamic era of digital payments.

How Do You File a Debit Card Chargeback?

First, the customer must attempt to resolve the issue with the merchant directly if they haven't already. If the merchant doesn't respond to the customer's attempts to communicate or won't resolve the issue, they can call their bank to dispute the charge.

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.

Why Do Debit Card Chargebacks Happen?

Debit card chargebacks happen for the same reasons as credit card charges. Fraudulent transactions and undelivered or damaged items are common reasons for these disputes, but confusion about a legitimate purchase also sometimes leads a customer to ask for 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.

What's the Difference Between Credit and Debit Card Chargebacks?

There are several key differences between debit card chargebacks and credit card chargebacks. One of the most important ones is that the legal limit on customer fraud liability for debit card transactions only applies if a report is filed within two days.

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

Manage Chargeback In-House Or OutshoreIn 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:

  Debit Card Credit Card
Initial transaction Cash direct from account
Registers debt owed
Cardholder liability cap $50 to total purchase value, depending on when the card is reported lost. Liability is capped at $50 if reported within two days, $500 if reported within 60 days, and the full transaction amount if reported after 60 days. $50
Dispute timeline Generally faster, due to limited consumer protection.
Generally slower
Timeline for  customer refund Up to ten days
Generally within 1-2 business days

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.

What's the Best Way to Fight Debit Card Chargebacks?

For merchants, fighting a debit card chargeback isn't any different than fighting a credit card chargeback. In either case, the best way to fight the chargeback and get your money back is to provide compelling evidence that the purchase was legitimate.

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.

How Can Merchants Prevent Debit Card Chargebacks?

Here's the good news about debit cards: Because of the differences between debit card chargebacks and credit card chargebacks from the customer's perspective, it may be easier to steer your customers toward not turning issues with debit card purchases into chargebacks in the first place.

Without question, the best thing you can do is provide top-notch customer service. When a customer feels like something has gone awry with a transaction, they're more likely to take it up with you and ask for a refund before they complain to their issuing bank.

A refund is always cheaper than a chargeback, and refunds avoid the additional consequences that can result from a high chargeback ratio.

Clearly articulated, readily accessible explanations of your policies in regard to returns, exchanges, and authorization holds can also help. Unexpected charges can be especially troubling for debit card users, so make sure your customers are fully informed about automatic charges, variable subscription amounts, fees, and anything else that might catch them off guard.

Your best practices for avoiding debit card chargebacks will also help you avoid credit card chargebacks—and when prevention isn't enough, you'll want a chargeback management firm in your corner to help you fight these chargebacks and win.

Want to stop the ever-growing chargeback trend and protect your revenue? Rather than write chargebacks off as a cost of doing business, download this guide and learn how to prevent them altogether.


Why Are Debit Card Chargebacks More Difficult for Cardholders?

Debit cards are linked directly to a bank account, rather than a loan from a credit provider. That means that there are different laws and fewer fraud prevention measures in place.

How Many Days Do Cardholders Have to File a Debit Card Chargeback?

60 days. After that, they may be left entirely responsible for the bill. Their liability for debit fraud may be only $50 if they file a dispute within 2 days.

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions or requests for advice to: win@chargebackgurus.comGet the guide, Chargebacks 101: Understanding Chargebacks & Their Root Causes

Ready to Start Reducing Chargebacks?