Everything You Need to Know About Debit Card Chargebacks
The US is undeniably a payment-card nation. As of 2023, the average American had at least one debit card — as well as four credit cards — in their wallet. There may be fewer debit cards, but they still account for an estimated $95.78 billion in purchases in 2024.
While cardholders tend to use the terms interchangeably, credit cards and debit cards are two very different things. One area of difference is chargebacks; it’s important for both consumers and merchants to understand how the process works in both cases.
In this post, we’ll examine what makes debit card chargebacks different, why it matters, and how to protect your business from both types of chargebacks..
Recommended reading
- A Step-By-Step Guide to the Chargeback Process in 2024
- Provisional Credits: Here’s Everything You Need to Know.
- Here are the 7 Valid Reasons to Dispute a Charge
- Provisional Credit Reversal: Steps to Recover Lost Revenue
- Chargeback Reasons: 25 Reasons Why Customers File Disputes
- Chargeback Life Cycle: How Do Card Disputes Work in 2024?
What is a Debit Card Chargeback?
- Debit Card Chargeback
A debit card chargeback is a debit card charge that has been reversed by a bank. The bank pulls the funds from the merchant's account and returns them to the cardholder's account.
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As with credit cards, most debit card chargebacks start when a cardholder contacts their bank to dispute a transaction. In a typical scenario, the cardholder claims that the transaction in question is the result of fraud or abuse. In both cases, the issuing bank will respond by retrieving those transaction funds from your merchant account.
When used correctly, chargebacks offer a critical layer of consumer protection. For example, if a debit cardholder is a victim of identity theft, they’ll be able to get their funds back through a chargeback. As we’ll see, however, not every fraud claim is based on actual fraud.
How do Credit Card & Debit Card Fraud Protections Differ?
The primary difference between payment cards is the level of fraud protection mandated by law. Credit cards offer the strictest protection, while the rules for debit and prepaid cards are a little looser.
Different federal laws regulate the type and amount of coverage that consumers can expect. Cardholders are typically liable for no more than $50 of fraudulent charges, but debit card dispute regulations have a few more stipulations than there are for credit cards.
Let's take a more detailed look at the different fraud protections mandated by law for three commonly used card types:
Credit Cards
Credit cards offer consumers the widest fraud protection. By federal law, a cardholder can only be held liable for the first $50 of unauthorized transactions at most. Beyond that, the bank must either eat the costs or try to recover the money through the chargeback process.
Debit Cards
Debit cards fall under the purview of the Electronic Funds Transfer Act. With debit cards, user liability is capped at $50 only if they notify the bank within two days of realizing the debit card is missing. Beyond that, they could be responsible for up to $500 of losses. Waiting more than 60 days to contact the bank about a fraud incident could mean the cardholder is liable for all unauthorized charges.
Prepaid Cards
Federal rules put into effect in 2019 now require banks to provide prepaid card users with coverage nearly identical to what debit cardholders have. Before that, prepaid cards traditionally came with limited (if any) fraud protection and only at the issuer's discretion. However, these new rules only apply to cards that are registered to a specific person. They don’t apply to gift cards, disaster-relief cards, health- and transit-related cards, etc.
When are Cardholders Encouraged to Use Credit Instead of Debit Cards?
Experts advise consumers not to use a debit card in high-risk situations, like card-not-present transactions or any situation in which the card leave’s the cardholder’s sight. Instead, they suggest using credit cards, which offer more fraud protection.
Because of the greater protections offered to credit cardholders, there are some situations where buyers would be better off using credit cards instead of debit cards. Because of the decreased fraud protection, consumers are regularly warned against using their debit cards in situations considered “risky.” These can include:
- Any Card-Not-Present Situation: Card-not-present transactions, especially eCommerce, carry a greater inherent risk of fraud.
- Purchases Requiring a Deposit: Using a debit card means the consumer’s cash is tied up until the deposit is returned.
- Restaurants: Because the card leaves the consumer’s sight, there is a greater risk of merchant fraud involved.
- Preorders: Chargeback time limits usually begin the moment the purchase is made. The deadline might expire before the consumer is aware of a problem.
- Recurring Payments: Consumers might forget about an upcoming charge and have insufficient funds available when the transaction is processed.
- Travel Accommodations: There is a higher risk of compromised data if the information is stored for months pending upcoming travel arrangements.
You would think that, as a result, merchants which fall into these categories would be less likely to see debit card chargebacks. However, consumers don’t always follow expert advice. You’ll want to pay extra attention if you’re in one of these higher-risk categories: you could actually see more debit card chargebacks.
When Can Cardholders File Debit Card Chargebacks?
Debit card chargeback protections exist to provide cardholders with recourse when something goes wrong with a purchase. They were never intended to be an equal alternative to the return process with a merchant. That’s why every bank urges cardholders to attempt to resolve issues before they file a chargeback.
Understanding what qualifies as a valid reason for a chargeback is important for effectively navigating this process.
Valid Reasons for Debit Card Chargebacks
- You notice a transaction you did not authorize. This might occur due to stolen card details or other fraudulent activities.
- You paid for items or services that were never delivered. For instance, if the merchant has become unresponsive or has ceased operations.
- The products or services you receive are significantly different from the merchant's description or are defective.
- You were charged more than the agreed price, or are being billed multiple times for the same item.
- If you've returned an item or canceled a service and the merchant agreed to issue a refund, but no refund was processed.
Invalid Reasons for Debit Card Chargebacks
- Changing your mind after a purchase does not qualify for a chargeback. Chargebacks are not a means to bypass a merchant’s return policy.
- A merchant has a clear policy on restocking or return fees, but you’re attempting a chargeback as a way to avoid these fees.
- Problems that are covered under a manufacturer’s warranty. These concerns should be addressed with the manufacturer or warranty servicer.
Learn how to dispute a charge
The point we’re trying to make here is that chargebacks should always be a last resort. It’s best for everyone involved if the cardholder can resolve the situation with the merchant whenever possible. This will be faster, require less back-and-forth communication and documentation, and there’s a better chance that everyone will walk away satisfied.
If the dispute is on a credit card, the refund will show up as available credit. For debit cards, however, any provisional funds will be deposited into the cardholder’s account. As a result, debit card customers can be easily lulled into thinking they have more money to spend than they really do. Remember, this is only a temporary credit; a courtesy from the bank while your claim is being processed, and will be reversed if the bank rejects your claim.
How Debit Card Chargebacks Affect Merchants
As we outlined above, there’s a clear distinction between credit and debit card protections from the cardholder’s perspective. From the merchant’s perspective, though? Not so much.
In both cases, unwarranted chargebacks will result in lost revenue. The seller loses the cost of the initial transaction, plus any merchandise shipped. They also get hit with a chargeback fee ranging from $20 to $100 per transaction. This fee is non-refundable, regardless of the outcome of the dispute.
There are indirect costs to consider as well. For example, each chargeback means taking a hit due to overhead costs like shipping and interchange fees. Over time, too many claims will negatively affect the company’s chargeback ratio and could lead to your bank account being frozen (or terminated altogether). Your business could then be placed on the MATCH List, which would bar you from getting another standard merchant account.
How to Fight Debit Card Chargebacks
You should never challenge a chargeback tied to genuine fraud or an error on your part. In these cases, you’re better off just accepting the claim. However, there are many cases in which sellers can — and absolutely should — fight back.
Merchants can fight back against invalid chargeback debit card claims through a process called representment. While there is a lot that goes into this process, here’s a basic rundown of how it works:
Step #1 | Examine the Claim
The bank will supply a reason code to explain the claim made by the cardholder. The seller should compare the cardholder’s claim to the documentation they have on file to see if it’s valid.
Step #2 | Gather Evidence
Sellers need evidence to fight an invalid claim. Acceptable documents can include transaction details, photographs, transcripts of conversations with the cardholder, and tracking or shipping information.
Step #3 | Draft a Rebuttal Letter
Merchant documentation must include a rebuttal letter that explains the situation and makes a succinct, yet compelling argument for why the debit card chargeback should be reversed.
Step #4 | Submit the Documents
After reviewing all documentation, the final step is to submit the claim to the bank. This must be done according to specific requirements (i.e., email, fax, physical mail, etc.).
Once the merchant submits their case, the acquirer will review it and forward it along to the issuer. It is then up to the cardholder’s bank to decide if the merchant’s argument is sound or compelling enough to reverse the debit card chargeback.
Top 5 Tips to Prevent Debit Card Chargebacks
Debit card chargebacks are not going away on their own. In fact, cardholders filed 615 million chargebacks in 2021, and that number is going to keep climbing year over year.
Merchants have to be proactive about this problem. So, with that in mind, here are five of our top tips for how to prevent debit card chargebacks:
#1 | Take Criminal Fraud Seriously
There are dozens of tactics fraudsters can use to take advantage of merchants and cardholders. Plus, they invent new schemes all the time.
Any good debit card chargeback management strategy will start with best practices to manage fraud risks. These include:
- Encouraging customers to create personal accounts for future purchases.
- Requiring strong passwords for accounts.
- Educating staff on fraud tactics and developing trends.
- Deploying a multilayer fraud management strategy backed by machine learning.
#2 | Deliver Excellent Customer Service
The average merchant can eliminate at least 20% of debit card chargebacks by optimizing their customer experience. Examples of practices to implement include:
- Promptly addressing all emails, phone calls, and social media messages.
- Training staff with enhanced problem-solving and dispute-resolution skills.
- Offering round-the-clock, live customer service across all contact channels.
- Make contact information easily accessible from every page of one’s site.
#3 | Be Clear about Authorization Amounts
Consumers can be easily confused by authorization holds. For example, hotels often place a hold on the debit card for more than the agreed-upon rate to cover potential damages and additional expenses.
While a credit cardholder might not notice the lowered available credit, a debit cardholder is more likely to be affected. If the merchant has authorized a charge that is more than the original transaction, the misunderstanding might cause the consumer to respond with a chargeback.
Be very clear with customers regarding any authorization holds. Outline the amount and the length of time the money may be held before applying the hold. Remember that some banks will hold the pre-authorization funds for one to eight additional business days. This is why it’s important to settle batched transactions as quickly as possible.
#4 | Simplify Returns
We want to emphasize this point: it should always be easier for cardholders to request returns than to file chargebacks.
Returns may not be ideal, but they offer an opportunity to rectify the situation in a way that benefits both parties. The consumer gets a refund, and the merchant avoids a chargeback. Plus, it provides a chance to build a stronger relationship with the customer and even to recover the sale.
Merchants will want to clarify this to cardholders. Impress on them that contacting the merchant’s customer service will be much easier and faster than contacting the bank.
#5 | Get Help
In-house chargeback management has its limitations. For instance, it’s extremely difficult to positively identify friendly fraud and prepare a chargeback response within the tight timeframes allowed by banks and card networks.
The good news is, help is available. Most merchants find that outsourcing to a professional management team offers higher ROI and a lot less work.
Call in the Experts.
Looking for a better debit card chargeback solution? Our free ROI analysis can show just how much you stand to gain using our end-to-end technology platform. Contact us today, and take the first step toward reducing your chargeback risk, recouping lost profits, and keeping your business safe from debit card chargebacks.
FAQs
Can you chargeback on a debit card?
Yes, you can initiate a chargeback on a debit card if you encounter issues like unauthorized transactions, non-delivery of goods or services, defective merchandise, incorrect charges, or unprocessed credits. Always try to resolve the issue with the merchant before contacting your bank to file a chargeback.
Can I dispute a debit card charge that I willingly paid for?
Yes, you can dispute a debit card charge you willingly paid for if the goods or services were not delivered as described, were defective, or if there were billing errors. You should first attempt resolution with the merchant before proceeding with a charge dispute through your bank.
What qualifies for a chargeback?
A chargeback is qualified when there are unauthorized transactions, non-delivery or misrepresentation of goods or services, defective merchandise, or billing errors.
Can I claim money back if paid by debit card?
Yes, you can claim money back on a debit card purchase through a chargeback if there are issues like unauthorized transactions, non-delivery, defective goods, or billing errors.
What is a valid reason to dispute a debit card charge?
Valid reasons to dispute a debit card charge include unauthorized transactions, non-delivery of goods or services, receipt of defective or not-as-described merchandise, or billing errors. Always attempt to resolve these issues with the merchant first before initiating a dispute with your bank.
Can a bank refuse to do a chargeback?
Yes, a bank can refuse to do a chargeback if the dispute does not meet valid criteria, such as proof of fraud, billing errors, or contractual breaches, or if the claim is filed outside the designated timeframe. Additionally, insufficient evidence or failure to first address the issue with the merchant can also lead to a refusal.
