TABLE OF CONTENTS
When it comes to reversing charges, there can be confusion between a chargeback and a refund. Understanding these differences is important for maintaining good consumer relations and avoiding financial penalties.
Keep reading on to find the differences between the two and the consequences that come with them.
What Is a Chargeback?
A chargeback is a transaction that is disputed by the cardholder to their issuing bank. Investopedia. “Chargeback Definition“. Accessed May 7, 2022. Chargebacks can occur for a variety of reasons, including fraud, non-delivery of goods or services, dissatisfaction, or mistake. Depending on the circumstances, the bank might provide funds back immediately, or it may need to carry out an investigation.
Chargebacks can be damaging to merchants who may incur additional costs and chargeback fees as part of the process. Overall, when used appropriately, chargebacks serve an important role in protecting consumer rights and helping to prevent fraud.
What Is a Refund?
At its most basic level, a refund is simply the act of receiving your money back after making a purchase. When a customer is unhappy with the purchase, they will directly request their money back from the seller. Sometimes, a refund happens simply because the buyer felt like changing their mind.
To receive a refund, the buyer will return the item to the seller and provide proof of purchase. In some cases, the seller may offer a partial refund instead of a full refund. For example, if an item is returned damaged, the seller may deduct the cost of repairs from the refund amount. If you’re a seller, it’s important to have your refund policy easily available to avoid any miscommunication.
What is the Difference Between a Chargeback and a Refund?
A chargeback and a refund are two terms that are often used interchangeably, but they actually represent two different concepts. A chargeback occurs usually because they believe they were the victim of fraud or another type of transaction error. A refund is an adjustment to a charge on a bill and occurs in situations in which a customer wants to cancel or return the product.
Chargebacks can only be issued by customers who have paid with credit cards, whereas refunds can be made regardless of the payment method. A customer initiates a chargeback to their bank within a set period of time after the transaction took place. Refunds may be requested at any time by either the seller or buyer.
Which Is Better for Merchants: Chargebacks or Refunds?
Whether you’re running an online store or managing a physical shop, chargebacks and refunds are two sides of the same coin. Chargebacks enable customers to get their money back if they experience issues with their purchase and see no resolution with you, the seller. Refunds act as a safety net for merchants by allowing them to resolve issues with their customers before chargebacks occur. Too many chargebacks look risky to your payment processor. Opting for refunds can actually be a more beneficial option for you, as a business owner.
No matter the reason, refunds are always up to your discretion. Some businesses have strict refund policies, while others are more lenient. As a general rule, it is always best to come to some sort of refund agreement than to take a chargeback hit on your merchant account.
Why Do Some Issues Turn Into Chargebacks Instead of Refunds?
There are a number of reasons why a customer might ask for a chargeback instead of a refund:
- The product is defective or damaged
- Your business may offer a partial refund when a customer is requesting a full refund
- Your refund policy is too strict and doesn’t allow a refund
- A customer feels they were overcharged by your business
How You Can Encourage Refunds Instead of Chargebacks
To help reduce chargebacks and encourage refunds, it’s best to provide clear information about your products and refund policy. Other strategies include offering straightforward customer support, clearly outlining your terms of service, and being responsive to customer inquiries. When customers feel that they have options with your business, it will encourage more positive outcomes.
What Is a Double Refund and How Does it Affect Merchants?
When a customer requests a refund, the merchant will issue back the funds, and the customer’s card receives a credit of the full amount. A double refund occurs when customers initiate a chargeback and receive a chargeback credit in addition to the refund credit. While double refunds are relatively rare, they cause significant financial damage to merchants since they must pay back both the refund and chargeback amount.
If your business finds itself facing a double refund, you have a couple of options to handle the situation. One is to work with your payment processor to dispute the chargeback and provide any documents that show you refunded the customer. Another option is to work with customers about the chargeback and see if they can fix it on their end.
8 Tips for Reducing the Risk of Refunds and Chargebacks
There are a number of steps you can take to reduce the risk of refunds and chargebacks. By following these tips, you can help protect your business from financial loss:
1. Have a clear refund policy
A chargeback can happen if there is no refund policy. Your refund policy should include information about the eligibility requirements for a refund, such as whether items must be returned in their original condition or not. It should also specify any time limits for requesting a refund, such as a window of 7 days after purchase. Additionally, it should clearly state any restrictions on how refunds will be processed, such as whether customers will be reimbursed for shipping costs or not. By creating a comprehensive refund policy, you can ensure that your customers will be comfortable purchasing from you.
2. Keep accurate records of all transactions
When running a business, it is crucial to keep accurate records of all transactions, including customer contact information, order details, and refund policies. This will help to minimize chargebacks and disputes over any payments as well as protect you from other types of fraud and erroneous claims from customers.
3. Use a secure payment gateway to process all online transactions.
One of the best ways to reduce the risk of chargebacks is to use a secure payment gateway to process all online transactions. This will help to protect your business from fraudsters who may try to steal customer information or run fraudulent card transactions on your website. A secure gateway will have fraud detection settings for you to adjust. If you sell online, you will want to take steps for fraud prevention.
4. Verify customer identity before shipping any products or services.
Verifying customer identity before shipping any products or services will help you confirm that you are dealing with a legitimate customer and prevent cases of fraud or malicious activity.
5. Require a signature for all deliveries.
Requiring a signature for all deliveries will give you proof that your customers received the products they ordered and will give you a stronger case if they later try to dispute the payment with their credit card company.
6. Use tracking information to verify that products were delivered
Using tracking information to verify that the products were delivered to the correct address can help protect you against situations where customers claim they never received their purchases. Tracking information is solid proof that products were received by a buyer.
7. Promptly resolve any customer complaints or refunds.
Delayed or poorly managed responses can result in chargebacks and dissatisfied customers, which are not only bad for business but can also harm your reputation in the long run. This may involve reaching out directly to the customer to provide full refunds as necessary and take steps to ensure that issues do not reoccur in the future. Whether you are dealing with chargebacks or refunds, it is important to treat each customer complaint as an opportunity to improve and strengthen your business.
8. Don’t offer products or services that are not in stock.
Finally, one of the best ways to reduce the risk of refunds and chargebacks is to only offer products or services that are in stock. This will help you avoid situations where customers feel they have been misled into making a purchase, which can lead to unhappy customers and subsequent disputes with their credit card companies.
Why You Should Consider Chargeback Management Tools
With a chargeback management tool, you can automatically keep track of all your chargebacks in one place. This way, you can quickly see which ones are valid and which ones are not. You can also use it to automate the dispute process so you don’t have to waste time manually filing disputes. And if you’re struggling with repeated chargebacks, a chargeback management tool can help you figure out why you received one and how to take steps to prevent them in the future.
Chargeback vs Refund FAQs
Let’s take a look at some outstanding questions that you may still have.
What happens during a chargeback?
In order to initiate a chargeback, the customer will submit an official request to their bank. The bank will review the specifics of the transaction and determine whether or not it meets its criteria for a chargeback. If so, they will notify both the merchant and the cardholder of their decision. During the process of a chargeback, your funds will likely be held by your payment processor until the review is completed. Depending on this outcome, either the merchant or customer may then pursue alternative measures to get compensation for their losses.
How does a merchant find out about a chargeback?
When a chargeback occurs, you will be notified by your credit card processor. This usually involves receiving an email notification or seeing a notice in your merchant account dashboard. You will then be expected to submit supporting documentation and engage in the dispute process. If you do not successfully contest the chargeback, you will not be given the funds from the purchase.
Does a bank really look into disputes?
Banks are required by law to investigate disputes but the truth is that banks are businesses too, and their priority is to minimize risk and maximize profits. The processing bank may not be as quick to take your word for it when there’s a disputed charge on your account. If you want them to investigate a problem, you’ll need to take some initiative and provide supporting documentation. The more information you can provide, the more likely it is they will take action. However, it’s important to remember that they are not obligated to resolve every dispute in your favor.
Can fraudulent chargebacks get reversed?
In some cases, customers may attempt to initiate a fraudulent chargeback by making a false claim or by providing incorrect information. If your credit card processor suspects that this is the case, they may take steps to recover your funds and potentially even go after the customer for damages.
Are chargebacks considered friendly fraud?
The term “friendly fraud” can encompass a wide range of behaviors. For example, if your business is not resolving an issue with your customer in a timely manner, the customer will then report a chargeback to receive the refund and not wait on a resolution. Additionally, if someone innocently makes a purchase but then later disputes it on the grounds of not having recognized the charge, that might also qualify as friendly fraud since the cardholder did not knowingly engage in fraudulent behavior. A friendly fraud chargeback will depend on your specific situation and the motivations behind it.
Chargeback vs Refund: Final Thoughts
Chargebacks and refunds are both tools that can resolve customer disputes. However, they are two very different things. With chargebacks, the customer goes to their bank and the credit card processor takes the money back from a merchant. Refunds involve the merchant giving money back to a customer without involving the cardholder’s bank.
It is always best to keep a transparent relationship with your customers to avoid any chargebacks on your merchant account. You may want to directly resolve refund requests to prevent your customers from going to their bank. You can take steps to prevent friendly fraud by providing excellent customer service and offering a clear refund policy. If you are a merchant who is prone to chargebacks, it is best to have a high-risk merchant account that is customized to your business patterns.
- Investopedia. “Chargeback Definition“. Accessed May 7, 2022.