Debit vs. Credit Card Chargebacks: 4 Things Merchants Must Know

Whether a customer pays with a debit or credit card doesn’t make much of a difference from a transactional standpoint—the process to use them in-store or online are very similar. But if the customer disputes the charge, sparking the chargeback process, whether they paid with debit or credit can make a big difference on how that dispute plays out—and how much the merchant is liable for.
 
This is important because chargebacks are a huge and growing issue for merchants. In fact, chargebacks were expected to soar from $23 billion in 2018 to $35 billion by 2021, according to research by the Aite Group. Mastercard estimates that merchants incur $15 to $70 in operational costs for every card dispute.

How debit and credit card chargebacks are similar

First, it’s important to understand that there are some basic similarities between debit and credit card chargebacks.
 
Cardholders can dispute charges on both types of cards—either because of suspected fraudulent activity or because of a transaction issue they couldn’t resolve with the merchant directly. When that happens, the bank issuing the card evaluates the dispute’s merit and may initiate a chargeback investigation to determine whether the debit or credit cardholder should receive a refund for the disputed charge. 

How they’re different

However, while chargebacks are allowed on both types of cards, there are some key differences that merchants need to be aware of: 

1. Fraud liability protection

Consumers generally have greater liability protection against fraud with credit cards. That’s because credit cards fall under the Truth in Lending Act’s Regulation Z, while debit cards are regulated under the Electronic Funds Transfer Act (EFTA).
 
Under EFTA, a consumer may be held liable for up to $50 for all unauthorised debit charges reported within the first two days of the charge being made. That liability jumps to $500 if they report it after two days, and they may be responsible for the entire charge if they wait to report it until after 60 days have passed. (They are liable for nothing if they report the debit card missing before unauthorised charges are made.)
 
Under Reg Z, consumers could be liable for up to $50 for unauthorised charges on credit cards. However, many credit cards today provide “zero liability” protection—meaning they pay nothing assuming the chargeback investigation shows the charge was indeed unauthorised.

2. Types of disputes

Regulatory guidelines for debit card disputes say that issuers only need to accept transaction disputes related to fraudulent activity or errors—such as an incorrect billing amount. They are not required to allow disputes related to goods and services-related problems, such as defective merchandise or a delivery problem. (That said, issuers sometimes allow for those kinds of disputes on debit cards.)
 
The types of payment disputes allowed on credit cards are generally broader and can include issues the cardholder experienced with a merchant’s goods or services.

3. Provisional credit timeline

With a credit card dispute, the consumer must receive a provisional credit—essentially a refund until the chargeback investigation is complete—within two to three days. With a debit card, that refund must occur within 10 days. Keep in mind that if the consumer is found liable during the investigation, the provisional credit may be reversed.

4. Consumer motivations and behaviors

How consumers typically use debit and credit cards differs and can also affect disputes. They are more likely to use debit cards for smaller, in-person purchases than they are to use them for, say, big-ticket purchases online. Part of that is because there is general consumer awareness today that credit card purchases are “safer” due to the stronger liability protection they provide.
 
Moreover, consumers may be more likely to go straight to merchants to resolve debit card issues because the purchase amount was taken directly out of their bank account (not just put on credit). So they may feel more motivated to do everything in their power to get a refund sooner and not wait for the chargeback investigation process.

What does this mean for merchants?

It’s important for merchants to understand the differences between debit and credit card chargebacks so they can take steps to prevent both types. If you experience an uptick in card disputes and chargebacks, you may want to look at different ways to minimise their impact on your bottom line.
 
This may include offering a more flexible customer return or exchange policy to encourage customers to work with you directly to resolve any issues. Additionally, collaborative tools that connect issuers and merchants can provide you with real-time alerts when a customer disputes a charge—allowing you to act immediately to resolve the dispute directly, preventing costly chargebacks altogether.