Debit Card ChargebackHow Debit Disputes Differ from Credit Disputes & Why it Matters

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..

What is a Debit Card Chargeback?

Debit Card Chargeback

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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.

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?

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:

When are Cardholders Encouraged to Use Credit Instead of Debit Cards?

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.

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.

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:

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.