Chargeback vs. RefundHow to Distinguish Payment Reversal Sources & Prevent Each From Happening

How to Tell a Chargeback vs. Refund — What’s the Difference & How Do You Prevent Both?

At first glance, chargebacks and refunds might seem like two sides of the same coin. Both refunds and chargebacks are typically triggered by the cardholder. And, in both cases, the merchant sees a reversal of funds. That means your bottom line takes a hit, whether it's a direct refund or a chargeback. 

Dig a little deeper, though, and you'll find that the implications for businesses differ significantly. For instance, chargebacks tend to have steeper repercussions. Over time, frequent chargebacks can even jeopardize one’s ability to process credit card transactions. So, while neither scenario is particularly cheerful, chargebacks pack a harder punch in the long run for a business.

Do you fully grasp the nuances between them? More importantly, are your customers aware of these differences?

Chargeback vs. Refund: Defining Each Process

Both refunds and chargebacks are processes aimed at giving the customer their money back. As we implied above, though, the two processes have different routes and effects. So, let’s start by very quickly outlining each of these processes.

Refunds are just part of doing business; even if a merchant provides stellar services, some occasional refund requests are inevitable. With a chargeback, though, the merchant loses sales revenue and any merchandise shipped, then gets hit with an added chargeback fee. They may even take a hit to their standing with credit card companies.

	Chargebacks	Refunds
Parties Involved	Cardholder, issuing bank, merchant, acquiring bank, and card network (if the dispute proceeds to arbitration)	Cardholder and merchant only
Cost to Merchant	$20 to $100 per filed dispute	None
Timeline for Resolution	30 to 180+ days	3 to 10 business days
Stages Involved	1. Initial cardholder dispute 2. Cardholder receives provisional credit 3. Merchant analyzes reason code 4. Merchant engages in representment 5. Pre-Arbitration 6. Arbitration	1. Cardholder contacts merchant for a refund 2. Merchant issues a refund
Complexity	High	Low
Governed By	Legislation: Fair Credit Billing Act of 1974 Electronic Funds Transfer Act of 1978 Credit CARD Act of 2009 Card network rules: Visa’s Dispute Management Guidelines for Visa Merchants Mastercard’s Chargeback Guide Merchant Edition	Merchant’s refund and exchange policy

Why a Customer May Choose a Chargeback Over a Refund

Diving deeper into the chargeback vs. refund conundrum, there are a few reasons why a customer might lean towards a chargeback.

That last point, in particular, creates a double dilemma for merchants. Not only do they part with the product, but the payment they were expecting gets reversed. If this becomes a recurring issue, there's the looming risk of higher processing fees, and even a potential freeze on their payment accounts.

But the story doesn't end with just financial hiccups. Friendly fraud can also seriously impact a merchant's reputation. Sorting out these situations means investing time and resources, making it crucial for merchants to stay alert and ensure transparent communication with their customers.

What is a Double Refund?

Getting hit with a chargeback should be bad enough. However, that loss can be compounded by turning into a so-called “double refund.”

Where a double refund comes into play is if, during the time the customer is disputing the charge with the card issuer, they also approach the merchant directly for a refund. The merchant, aiming to offer good customer service, might process the refund, unaware that the card issuer is simultaneously initiating a chargeback due to the customer's dispute.

It could be that the consumer contacts the merchant for a refund, but the funds don’t show in the customer’s account when expected. So, the customer files a chargeback, assuming the merchant ignored or denied the refund request. Or, maybe the customer contacts the bank and initiates a dispute, then contacts the merchant and requests a refund. 

In either case, the result is that the merchant effectively refunds the amount twice. Once when they process the direct refund, and again when the chargeback from the card issuer comes through. This overlap can pose significant financial challenges for merchants. The threat that double refunds pose emphasizes the need for effective communication and robust transaction tracking.

Learn more about double refunds

10 Tips to Prevent Refunds & Chargebacks

Merchants should quickly process refunds and clearly communicate to customers the expected timeframe for the refund to reflect in their accounts. This is crucial to mitigate the risk of double refunds, and friendly fraud chargebacks.

That said, a merchant’s best bet is generally to take proactive steps that work to prevent payment reversals — in all their forms — before they happen. Don’t think of it as chargeback vs. refund prevention; it’s chargeback and refund prevention.

Here are some ideas that sellers should consider:

#1 |  Quality Control

Source products from reliable suppliers. Authenticate all designer or luxury goods, in particular, before making them available for sale. These are hot targets for knock-off goods that suppliers might pass off as legitimate.

#2 |  Accurate Product Descriptions

Give customers as much detail about the products as possible without exaggerating features or benefits. Details like size, color, dimensions, etc. — really spell out the details here.

#3 |  High-Quality Images

Small, pixelated product images won’t cut it. Merchants should give customers multiple clear, high-definition pictures (and video, if possible) to show the item from different angles.

#4 |  In-Depth FAQs

Don’t wait for customers to ask questions. Create a detailed section for “frequently asked questions”; provide specific answers on products and policies that are likely to come up repeatedly.

#5 |  Rapid Response

One-third of customers expect a response to email or social media inquiries within one hour. To meet that high standard, merchants should consider offering round-the-clock live service across all channels.

#6 |  Proper Handling

Package all items carefully, and review orders before they go out to ensure they are delivered to the correct destination. Slight errors in logistics can mean lost or damaged goods.

#7 |  Easy Cancellations

If you do business on a recurring billing or a subscription model, make it as easy as possible for customers to cancel service. Cancellations aren’t ideal, but they’re better than chargebacks.

#8 |  Up-Front Information

Payment, shipping, and returns policies should be clearly stated in simple language and easily located on the merchant’s website. Making buyers go hunt for policies makes calling the bank a more enticing option.

#9 |  Exception Indicators

If the standard rules don’t apply (such as with “final sale” items), ask buyers to confirm they know these exceptions before purchasing. They shouldn’t be caught off-guard when trying to return goods.

#10 |  Chargeback Alerts

Deploying chargeback alerts can drastically reduce exposure to risk by alerting the merchant about a pending chargeback before it’s filed. 

There are other examples and best practices to consider, too. In fact, we’ve put together a guide with dozens more best practices to prevent chargebacks and refund requests. Click below to download your free copy:

GET THE GUIDE

Here’s the bottom line: merchants should make everything — especially return rules— obvious and easy from the customer’s perspective.

As a bonus tip: when merchants get return requests, they should think of ways to turn them into opportunities. Offering a 10-20% bonus on merchandise returns if customers will take store credit instead of cash, for example. This lets the merchant recover the sale and build positive customer relationships, all with no extra effort.

Consider Expert Help

When it comes to the question of chargebacks vs. refunds, there’s really no question about which is more harmful. Issuing a refund will almost always be faster, easier, and less costly than dealing with a chargeback. If chargebacks are still a problem, though, you may want to consider professional help.

Chargebacks911® offers end-to-end solutions for dealing with post-transactional fraud. We can help you create a chargeback management strategy that’s customized to your business to let you offload chargeback management and focus your attention on growing your business. Contact us today to get started.