debit card chargebacks

Debit Card Chargebacks: A 2022 Guide for Merchants

In the modern world, accepting digital payments is essential in running a successful business. 

When you accept debit card payments you can reach more prospective customers and open your business up to more opportunities. However, debit card payments come with certain risks that can potentially cause damage to your revenue stream – chargebacks being one of the most significant.

In this article, you’ll learn about debit card chargebacks, how they affect merchants, and the best way to deal with them.

What is a Debit Card Chargeback?

When a consumer purchases a product or service with a debit card, its cost is credited from the cardholder’s bank and transferred to the merchant’s account upon payment. A debit card chargeback happens when the bank reverses this process because the cardholder filed a dispute. After determining the validity of the claim, the bank then draws the amount from the merchant’s account and transfers it back to the cardholder’s account, frequently with additional fees. That debit card charge is called a debit card chargeback.

The major difference between debit and credit card chargeback lies in the type of transaction. As you can imagine, a debit card transaction involves a withdrawal of funds directly from the cardholder’s bank account, whereas a credit card transaction involves remitting a debt to the issuing bank.

Therefore, customers who used debit cards spent real money, so they are more likely to resolve the issue quickly to recover their losses as soon as possible. What this means for merchants is that customers are more inclined to directly contact you to resolve issues rather than escalating the problems to the bank, thus saving you from chargeback fees.

Why do Debit Card Chargebacks Happen and How Do They Affect Merchants?

Chargebacks exist to protect consumers from fraudulent sellers and protect their funds from being illegally used for fraudulent transactions, such as in instances of identity theft. But aside from fraud claims, chargebacks happen for several legitimate reasons such as incorrect billing, unissued refund, unrecognized transactions, and unreceived merchandise.

Chargebacks are potentially problematic for merchants primarily because consumers who have ill intentions abuse this protection to legally get away with not paying for something they intentionally bought. Thus, they can potentially lead to significant revenue losses if not managed closely.

Take the case of shipped merchandise, for example. In addition to losing the purchase price and the item, you would have to pay the shipping and interchange fees. You’re also responsible for paying chargeback fees that can range from $20 to $100 per transaction and are non-refundable regardless of the outcome of a dispute.

On top of that, your account reputation is also at risk when you receive consecutive chargebacks. If you exceed the acceptable chargeback threshold, it could result in your bank account’s freezing or permanent closure. Moreover, if things get worse, it can be difficult for you to open another merchant account.

What’s the Best Way to Deal with Debit Card Chargeback?

Once you receive documentation for a chargeback from the bank, you generally have two options: accepting or contesting it. Accepting it means you lose the merchandise or service cost, and you are also liable for other associated charges for materials and processes such as shipping, interchange, and stocking. If you conclude that you have done nothing wrong on your end, it is worth fighting the chargeback claim filed to clear your name.

However, note that regardless of the outcome, you, as the merchant, are still responsible for paying the chargeback fees charged by the acquiring bank.

Chargeback Process and Resolution

The dispute process often starts with a consumer complaint, but it can also be set forward by the issuer when they identify a problem with a transaction. Whatever the case, merchants can fight back against debit card chargebacks through the strictly regulated process called Chargeback Representment. You have the right to contest an illegitimate claim the same way consumers can dispute a transaction. 

Here are some basic steps you can follow after receiving a chargeback dispute:

1. Examine the claim and identify the reason

To appropriately address and counter the claim, it is crucial to first identify the reason for the dispute. Banks usually provide an alphanumeric code called Reason Code which represents the reason for the chargeback. Use this knowledge in planning your next course of action. Visa, Mastercard, American Express, and Discover have their reason codes with different dispute limits.

2. Gather and organize evidence

Evidence you can use to support your dispute includes sales receipts and order forms, proof of delivery, and other relevant communication copies sent via email, social media sites, sales platforms, etc. You must organize them in an easily understandable manner to effectively support your case.

3. Make a Letter

Now, it’s time to detail your case formally and outline what transpired in the transaction. Use your compiled evidence as references to solidify your claim. It is essential to write your letter concisely, professionally, and as evidence-based as possible. 

4. Submit your documents

Finally, make sure to review all the necessary documents required by the bank and submit them as instructed.

Tips to Prevent Debit Card Chargebacks

While chargebacks can be disputed, you still want to reduce the likelihood of them happening in the first place as much as possible. Follow these tips to lower the instances of chargebacks in your business:

1. Be Vigilant of Genuine Fraud

As merchants, you are expected to be responsible for managing fraud risks to protect yourself and your clients. Each business system is different, so you must consult IT experts on employing a good fraud management strategy to minimize fraud risks in your business.

2. Provide Outstanding Customer Service

Many chargeback disputes stem from undelivered or damaged items. Some are because of product dissatisfaction, which is not a legally accepted reason for a chargeback but negatively affects your reputation nonetheless. 

By streamlining your operational processes and providing a stellar customer experience, you can avoid the arduous process of contesting a chargeback and can save yourself much trouble.  

3. Be approachable

Building on the previous point, there are many instances when consumers file chargeback disputes simply because of misinformation and miscommunication. That is why you must let your customers feel like they can quickly contact you when they experience problems, so you have the chance to clarify misunderstandings before it escalates to authorities.  

Conclusion

No merchant wants to deal with chargebacks, as they not only affect their profits but jeopardize their standing with banks. That’s why being aware of the reasons why they occur and their dispute process is so important. By understanding how to fight chargebacks and reduce their likelihood, you will be in a much better position overall.

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