A chargeback is a chargeback, right? Actually, there can be subtle differences between debit and credit card chargebacks and it’s wise for businesses to understand them. We’ll explore these differences below, but if you have any questions about chargebacks, no matter the type, feel free to reach out to our team. The experts at ChargebackHelp would be happy to provide assistance.
A Quick General Review of Chargebacks
Before jumping into the differences between debit card and credit card chargebacks, it helps to understand what chargebacks are. When a chargeback is filed, the merchant stands to lose some or all of the revenue from a specific transaction. If the cardholder is successful and convinces their card-issuing bank to approve a chargeback, they’ll get their money back. Likely, the cardholder will also be able to keep any services or goods received during the transaction.
In addition to losing revenue from the sale, the merchant will also get hit with chargeback fees, which typically range from $20 to $100. Further, the merchant’s chargeback ratio will rise, and if it becomes too high, the acquiring bank may charge higher processing fees or even drop the merchant altogether.
Theoretically, chargebacks protect cardholders from fraud, including fraud perpetrated by shady businesses and also criminals who steal cards and card data. When used properly, this is exactly what chargebacks do. Unfortunately, however, many cardholders use the chargeback process to defraud merchants. This makes it crucial for merchants to prevent and fight chargebacks as much as possible.
With all the above in mind, let’s look at the key differences between credit card and debit card chargebacks.
The Evolution of Card Transaction Legal Frameworks
Credit and debit cards are ubiquitous now. However, when they were first rolled out, they were a bit exotic as people had relied on cash and checks for a long time. The idea of simply presenting a merchant with a card was rather alien, and many cardholders, consumer advocates, policymakers, and others were rightly worried about fraud.
In 1974, Congress moved to protect cardholders with the Fair Credit Billing Act (FCBA). This act didn’t outline the chargeback process specifically but did require that cardholders be given recourse. Industry stakeholders ultimately defined much of the chargeback process.
However, the FCBA didn’t apply to debit card transactions. In 1978, protections were extended to debit card transactions by the Electronic Fund Transfer Act (EFTA), but differences in the legal frameworks mean the protections aren’t quite the same. As a result, there are differences between credit and debit card chargebacks, which we’ll examine below.
The Key Differences Between Credit and Debit Card Chargebacks
Given that debit and credit card chargebacks stem from different legal frameworks, there are some crucial differences between the two. (Keep in mind, however, that different banks may set differing guidelines and rules.) You can see many of the key differences below but reach out if you have questions or concerns:
Funds
When a credit cardholder is hit with a chargeback, they’re provided with an account credit, and their funds aren’t tied up. With debit cards, the disputed amount is frozen and inaccessible to the cardholder. Meanwhile, with credit card chargebacks, the merchant’s funds are tied up, potentially creating cash flow issues.
Liability
With credit cards, the cardholder is liable only for up to $50. Debit card users are liable for only $50 if reported within 2 days, but this can rise to $500 if reported after two days but before 60 days have passed.
Timeline
With a debit card, the cardholder is immediately losing their money and thus has an impetus to resolve the issue quickly. The credit card representment process, meanwhile, typically unfolds rather slowly. Often, the cardholder simply isn’t under as much pressure to complete everything on their end since it’s the merchant’s cash that is tied up.
Refunds and Reversals
With credit card chargebacks, if a refund is ultimately extended to the cardholder, it only takes a day or two for the credit reversal to be completed. With debit transactions, banks may take up to 10 days to complete the refund.
In Summary: Debit Cards Offer Some Advantages For Merchants But All Chargebacks Are a Major Threat
Ultimately, debit card chargebacks are a bit more favorable for merchants, and banks as well. (Chargebacks tie up the bank’s money and they stand to lose interest on the loan). The chargeback protections stemming from the EFTA aren’t as generous either. Owing to these factors, among other things, payment processors may even charge lower fees when processing debit card transactions.
That said, credit cards are still great for customers and businesses alike when used properly. High inflation and economic constraints have led to increased credit card use, with the Federal Reserve reporting a $24 billion increase in credit card use from the second to third quarter (2024). Credit makes it easier for customers to make purchases, meaning merchants stand to enjoy higher revenues.
No matter the card type, chargebacks are a major threat to businesses. That’s why the team at ChargebackHelp has built tools that make it easier for merchants to prevent and successfully fight chargebacks.