Chargeback vs. Refund: Why Merchants Need to Know the Difference
Chargeback vs. refund: they can appear very similar at first glance. However, their respective consequences are worlds apart. Do you know the difference? Do your customers?
Refunds and chargebacks are both initiated by the cardholder, and both mean you lose money. Neither is something you’re going to be happy about, but chargebacks are much costlier. They’re also more likely to have a long-term negative impact on your business.
In this post, we take a look at how these two actions compare. We’ll see why one does more harm than the other, and talk about how you can insulate your business against both.
Chargeback vs. Refund: Here’s How They Differ
Many people use the terms “refund” and “chargeback” interchangeably. That’s not surprising; at the most basic level, the differences can seem negligible. Both involve a customer who is in some way unhappy with a transaction, and both lead to that customer getting their money back. From the consumer’s perspective, they both accomplish the same goal.
Things are different on the merchant side, though. Let’s look at both terms individually and then compare their impacts.
No merchant likes to refund money, but it’s an accepted part of running a business. With refunds, customers directly contact the merchant, who returns the money paid for a transaction. These exchanges are often called “returns.” The consumer returns the purchased item to the merchant, and the merchant returns the price of the sale to the consumer.
It all sounds fairly straightforward, but the exchange is not exactly quid pro quo. Returns have certain incidental fees you don’t always think about. Return shipping is a big one, and there are costs for restocking merchandise (assuming it’s in resalable condition). If defective or damaged, you may have to ship it back to a distributor, or just eat the cost of the item.
The truth is that US consumers returned $482 billion worth of merchandise in 2020. Returns eat into your bottom line, so obviously, you’ll want to avoid as many refunds as possible. If handled the wrong way, though, this effort can quickly backfire, which we’ll discuss later on.
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The difference between chargeback costs and return costs is staggering. With a chargeback, you still lose the revenue from the initial sale, and you lose the interchange fees, shipping fees, and other return costs mentioned above. The similarities stop there, though.
A chargeback is not a return. Your customer is supposed to send the goods back to you, but this rarely happens as the cardholder has no real incentive to do it. So, you’re out everything you’d lose from a refund, plus the actual merchandise. On top of that, you’re forced to pay added fees to cover the cost of chargeback administration.
Those are just the immediate expenses. Each customer dispute also counts against your chargeback ratio. If your chargeback ratio gets too high over time, you may be forced to switch to a high-risk merchant account, adding even more costs. In a worst-case scenario, you could lose the ability to accept credit cards altogether…potentially dooming your business.
Sometimes consumers may contact both you and the bank to address issues with a transaction. If your customer files a chargeback, it’s unlikely you’ll know it immediately. That means it’s possible for you to issue a refund even though the chargeback process is already underway.
In this situation, you’ll probably be able to challenge the chargeback and recover some of your revenue. Even if you do, however, you’ll still lose the administration fees, and you’ll have another chargeback go against your ratio.
It’s possible for this scenario to arise organically. It could be that the cardholder simply called both you and the bank seeking resolution because they didn’t understand the chargeback vs. refund dichotomy. More frequently, however, the culprit is a fraudster attempting to “double-dip” and get twice the return. This brings us to another aspect of the chargebacks vs. refund comparison: friendly fraud.
Refunds, Chargebacks, and Friendly Fraud
Both of the above examples are considered “friendly fraud,” in that the fraud came from an actual customer. In the first scenario, the fraud was not intentional, but the damage to your business is basically the same either way.
Unfortunately, customers could commit friendly fraud without realizing what they’re doing. For example, a cardholder who didn’t want to confront the merchant might contact the bank instead, believing that a refund and a chargeback are the same things.
The fact is, roughly 8 in 10 consumers have committed friendly fraud at least once out of convenience. If your return policy is too strict or too complicated, the cardholder bypasses you and contacts the bank. If it works, this sets a bad precedent and encourages repeat attempts. It’s no wonder why half of all cardholders who successfully commit friendly fraud will do it again within 90 days.
You do have the option to challenge the chargeback through representment. You need solid evidence that a claim is unwarranted, though, and even in clearly fraudulent cases, your odds of winning a reversal are still low.
The representment process is full of complex requirements and tight deadlines. You might get the chargeback reversed, but the issuer may file a second chargeback, and start the process all over. This is why respondents in the recently-released 2021 Chargeback Field Report had an average net chargeback recovery rate of just 12%.
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What Can I Do to Protect Myself?
It would be nice if your customers were satisfied with 100% of the transactions. In the real world, however, refunds and chargebacks happen all the time. It will almost always be in your favor to offer a refund rather than risk a chargeback. In fact, you should try to push your customers in that direction.
That may sound strange, but encouraging customers to request a refund makes sense. Remember, from the customer’s point of view, there’s not much difference between the two. To you, though, there’s no comparison on the question of refund vs. chargeback.
Buyers with legitimate complaints don’t want to jump through hoops. They just want their money back, and they’ll find a way to get it. If it seems like too much hassle to contact you for a refund, that person will likely turn to the issuer instead.
With all that in mind, the chargeback vs. refund question is no contest. Chargebacks are supposed to be a last resort, and it’s better to make sure customers go for a return first, every time.
Tips to Stop Returns WITHOUT Causing Chargebacks
Here's the goal: minimize returns without causing chargebacks to rise in response. But how? If you’re using a fraud filter, you could try tightening the parameters. As we mentioned earlier, though, that can backfire by increasing friction, and it won’t have much of an impact on friendly fraud.
Friction will typically cost you more due to false declines than what you stand to save through chargeback prevention. Experts estimate that in the US alone, false declines cost merchants over $330 billion annually. Generally, your best bet is to take proactive steps that work to prevent returns before they happen. Here are some areas you should consider:
There are other examples, but the bottom line is making everything—especially returns—obvious and easy from the customer’s perspective.
When you do get return requests, think of ways you can turn them into opportunities. You can try offering a 10-20% bonus on merchandise returns if customers will take store credit instead of cash, for example. This lets you recover the sale and build positive customer relationships, with no extra effort.
Consider Professional Help
When it comes to the question of chargebacks vs. refunds, there’s really no question 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.
Is a chargeback the same as a refund?
No. Refunds are provided by the merchant in exchange for the return of a purchase. Chargebacks are forced payment reversals in which the consumer typically does not return merchandise to the merchant. The merchant will also be hit with an additional chargeback fee.
Can a customer get a refund from a return AND a chargeback?
Unfortunately, yes. If a customer contacts both you and the issuer, the bank may file the chargeback at the same time you issued a refund. You may be able to get this reversed, but you will still need to pay the chargeback fee.
If the chargeback is fraudulent, can I get it reversed?
It’s possible, in some cases. However, the process is complex and time-consuming, and again, you will still be responsible for any chargeback fees.
Are all chargebacks friendly fraud?
No, but friendly fraud—unwarranted chargebacks that come from customers—is the leading cause of chargebacks.
Can I refund a chargeback?
No. If you’re a cardholder, there is no way to “refund” a chargeback to the merchant if you request one on accident. This is why it’s so important to understand the chargeback vs. refund question.