Debit Card Chargeback

Debit Card Chargeback

How does a Debit Card Chargeback Differ from Other Disputes?

A debit card chargeback is not always processed the same way a credit card chargeback would be. While each card type has its own methodology, debit cards are normally going to offer fewer protections than credit cards. Consumers should take this into consideration before making purchases, particularly when shopping online.

debit vs credit

Payment Card Differences

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 considerable differences between the three types of cards.

Each offers its own set of benefits as well as risks, particularly when it comes to chargeback disputes. A debit card chargeback has a different outcome as compared to a credit card dispute, or even a prepaid card chargeback. Consumers who don't understand the details may be in for an unpleasant surprise.

Before we get into the specifics of a debit card chargeback, let's take a look at the differences in overall fraud protection awarded to the different cardholders.

Fraud Protection Refund time frame
Credit Card Cardholder liability is capped at $50. Accounts are usually reimbursed immediately or within a few days.
Debit Card If reported within two days, liability is capped at $50. If reported after two days, liability is capped at $500. If reported after 60 days, the cardholder is liable for the entire transaction amount. It might take 10 days for the bank to award a refund.
Prepaid Card Liability is determined at the discretion of the issuer. At best, protection will mimic a debit card. The time limit is also at the discretion of the issuer, but usually is within 10 days.

Credit Cards

When it comes to fraud and chargebacks, credit cards offer the widest protection. A cardholder would, be liable for the first $50 of an unauthorized transaction at most. These days, issuers often provide zero-liability cards, meaning the cardholder will be reimbursed for the full amount of the fraudulent charge.

Also, credit card transactions don't affect the consumer’s bank accounts or cash reserves. The available credit may drop temporarily after a fraudulent purchase, but otherwise, the transaction will likely be nothing more than a minor inconvenience. Finally, once a chargeback has been filed, a refund should be credited to the account immediately.

Debit Cards

Many consumers prefer to use debit cards for their immediacy; the cards are tied directly to the user's bank account, and money is removed as soon as a transaction takes place. Since cardholders can’t spend money they don’t have, relying on debit cards can help keep debt in check. Despite the positive aspects, however, debit card use comes with a significant risk: reduced fraud protection.

Credit cards have a maximum fraud liability of $50 regardless of time frame; however, that liability cap only lasts two days on fraudulent debit card purchases. If the cardholder doesn’t report a lost or stolen card at once, the fraud protection disappears quickly. After two days, the liability jumps to $500, and consumers who let two billing cycles pass before reporting fraud might not be reimbursed at all.

And because debit cards do function in near-real time, a fraudster can do a lot of damage with just a small window of opportunity. For example, a criminal could completely drain the consumer’s bank account before the unauthorized purchases or cash withdrawals were even detected.

But even with timely reporting, the law allows banks to take up to 10 days to review a claim before issuing refunds. While cardholders may see refunds sooner, they will likely feel the effects of limited access to necessary funds.

Prepaid Cards

The premise of prepaid cards is simple: the consumer pays for a certain amount of money to be attached to a card, then enjoys the convenience and security of using a credit card without increasing debt. These cards originally grew in popularity among individuals who were unable to secure traditional checking or credit card accounts. Now, though, many consumers actually prefer prepaid cards to other payment methods.

But even as the popularity of prepaid cards continues to grow, consumers need to realize they are still at risk. Prepaid cards may function like credit or debit cards, but they aren’t tied to an account of any kind: they are essentially the equivalent of cash, and thus come with very limited fraud protection.

The fraud protection offered to cardholders—including the right to file a prepaid card chargeback—comes at the discretion of the bank. While some issuers will provide roughly the same protection as a debit card, a refund for unauthorized transactions isn’t guaranteed. Additionally, the law doesn’t demand issuers give cardholders the option to file chargebacks based on billing errors or quality issues.

How a Debit Card Chargeback Affects the Merchant

The decreased fraud protection offered to cardholders doesn’t impact the merchant nearly as much as it does the consumer. If a customer is unhappy, a debit card chargeback may work in the merchant's favor.

Consider the following:

  • Of all options, debit card chargebacks pose the lowest threat for card-present merchants, as a chip-and-PIN purchase is a comparatively safe transaction. It is highly improbable a card-present merchant will see a debit card chargeback because it will be extremely 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. Consequently, 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 prevents 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 from a simple return.

Every credit card purchase is essentially a small loan from the issuing bank. The consumer makes a purchase, the bank pays the merchant, and the cardholder reimburses the bank once a month. If a cardholder disputes a transaction through a chargeback, the issuer realizes it might not be repaid for the loan. Therefore, it is 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 financial institutions. It's easy to see, though, why credit card chargebacks could be given priority…especially considering 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. Experts constantly advise consumers not to use a debit card in certain situations for their own protection:

  • 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.

Thus, merchants with any of the above characteristics are less likely to see a debit card chargeback compared to a credit card one.

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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

Filing a chargeback is more complicated than securing a refund, though consumers often file chargebacks assuming the opposite is true. Merchants can make a refund seem more enticing than a chargeback 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 round-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 debit cards for more than the agreed-upon lodging 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 lead 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.

Get Help Managing Debit Card Chargebacks

While not as common as other transaction disputes, debit card chargebacks do happen. Need help reducing your risk of chargebacks and recouping lost profits? Our free ROI analysis can show you just how much more you can earn by taking control of chargebacks. Find out more below.

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