How do Credit Card and Debit Card Chargebacks Differ?
Most of today's consumers are familiar with debit, credit, and prepaid cards, often using the terms--and the cards themselves--interchangeably. This can lead to problems, in some cases, as there are significant differences between the three types of cards.
For consumers, each card type offers its own set of risks and benefits --particularly when it comes to chargebacks and other protections disputes. Things change less on the merchant side, but there are still a few differences worth noting.
Before we get into the specifics of a debit card chargeback, let's take a look at the differences in overall fraud protections from the different cardholders' perspectives.
Credit cards offer consumers the widest fraud protection. By Federal law, a cardholder is only liable for the first $50 of an unauthorized transaction at most, with many issuers offering cards with zero liability.
Debit card holders are protected under a different law, the Electronic Funds Transfer Act. With debit cards, users' 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 a crook’s spending spree. And waiting more than 60 days to contact the bank could leave a user stuck paying every cent of the unauthorized charges.
Nowadays, many consumers actually prefer prepaid cards to other payment methods. Unfortunately, prepaid cards have traditionally come with very limited, if any, fraud protection, and usually at the discretion of the issuer. Federal rules scheduled to go into effective in 2019 will finally require banks to provide prepaid card users coverage nearly identical to what credit cardholders have.
The new rules will only apply to cards that are registered to a specific person. That means things like gift cards, disaster-relief cards, and health- and transit-related cards still won't offer much if any protection from fraud.
How Debit Card Chargebacks Affect Merchants
The decreased fraud protection offered through debit cards doesn’t impact the merchant nearly as much as it does the consumer. In fact, if a customer is unhappy and considering a chargeback, debit card chargebacks can work in the merchant's favor.
Consider the following:
- Of all options, debit card chargebacks pose the lowest threat for card-present merchants, because a chip-and-PIN purchase is a comparatively safe transaction. It's highly improbable card-present merchants will see debit card chargebacks; it's simply too difficult for the cardholder to prove fraud.
- Debit card users will probably need to jump through several hoops to file a chargeback with their issuing bank. For that reason, it's normally easier and quicker for a cardholder to request a refund directly from the merchant. This gives the merchant the opportunity to rectify the situation in a way that benefits both parties: the consumer gets a refund and the merchant avoids a chargeback.
- Even if a consumer is able to persuade the bank to file a debit card chargeback, the amount disputed might be less than the original purchase amount due to the elevated cardholder liability. Again, both the cardholder and the merchant benefit more from a simple return.
- Every credit card purchase is essentially a small loan from the credit card network. If a cardholder disputes a transaction through a chargeback, the card network realizes it might not be repaid for the loan. Therefore, it's in the network’s best interest to resolve credit card chargebacks quickly.
With a debit card chargeback, however, the bank has less incentive to recover the lost funds. After all, the cardholder has lost the money, not the bank. Obviously, that's not the official policy for banks, but it's easy to see how credit card chargebacks could be given priority--especially in light of the growing number of overall chargebacks banks must address.
- Finally, because of the decreased fraud protection, consumers are regularly warned against using their debit card in situations considered risky:
- Any Card-Not-Present Situation: Consumers are already at a greater risk of fraud when participating in card-not-present transactions (especially mCommerce). Therefore, using a card with less-than-ideal fraud protection would be irresponsible.
- 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, the risk of merchant fraud is greater.
- Buy Now, Deliver Later: Chargeback time limits usually begin the moment the purchase is made. This means the deadline might expire before the consumer is aware of any trouble.
- Recurring Payments: Consumers might not have sufficient funds in their bank account when the transaction is processed because they forget about the upcoming charge.
- Travel Accommodations: There is a higher risk of compromised data if the consumer’s account information is stored by the merchant for several months until travel arrangements are executed.
Because experts are constantly advising consumers not to use a debit card in these situations, merchants that fall into these categories are less likely to see a debit card chargeback.
Steps to Prevent Debit Card Chargebacks
While debit card chargebacks are less likely than credit card chargebacks, it is still important for merchants to take the necessary steps to prevent them from happening.
#1. Deliver Excellent Customer Service
iling a debit card chargeback is usually more complicated than securing a refund, but merchants can make a refund seem even more enticing, simply by providing exceptional customer service. This includes:
- Promptly and adequately addressing all emails, phone calls and social media messages
- Training staff with enhanced problem-solving and dispute-resolution skills
- Offering around-the-clock customer service
- Providing sufficient contact information
#2. 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 card holder might not notice the lowered available credit, a debit card holder is more likely to be affected by less accessible cash. 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.
Of course, once the charge has been applied to the account and the authorization hold is removed, the cardholder will again have access to all the available funds in the account. If the chargeback has already been filed, however, the damage is done.
Be very clear with your customers regarding any authorization holds, including the amount and the length of time the money may be held. Remember that some banks will hold the pre-authorization funds for one to eight business days making it important to settle batches quickly.
#3. Get Help Managing Debit Card Chargebacks
While they might not be as common as other forms of transaction disputes, debit card chargebacks do happen. If you’d like help reducing your risk of chargebacks and recouping lost profits, let us know. Our free ROI analysis can show you just how much more you can earn by taking control of chargebacks. Contact Chargebacks911 today.