What’s the Difference in a Chargeback vs. Refund?
Chargeback vs. refund: in either case, you’re losing money. But how do these two differ? Is one costlier than the other?
Obviously, no one likes when customers return merchandise. It means you lose a sale, and the merchandise you might have already replaced in your warehouse is now taking up room on the shelf. There’s a world of difference between a chargeback and a refund, though, and even the worst return is still preferable to the best chargeback.
Let’s look at these two side-by-side, see why one is better than the other, and how you can insulate your business against both.
Chargeback vs. Refund: Dare to Compare
Returns are an easily-understood concept: the cardholder makes a purchase, then later decides he or she does not want the item. The buyer either exchanges it for something else, or just takes the money back.
Seems innocuous, right? But a return has certain incidental fees you may not recognize at first. Return shipping is a big one, and there are costs for restocking merchandise (assuming it’s in resaleable 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 returns cost retailers in the US roughly $351 billion every year. In contrast, direct chargeback costs to merchants came to just over $19 billion in 2017. That’s a fraction of the impact returns had overall, but when we compare refund vs. chargeback losses on a case-by-case basis, the issue gets much clearer. That’s when you’re able to see what you’re really losing per dollar.
With a chargeback, you'll still lose the revenue from the initial sale, plus the interchange fees, shipping fees, and other costs you lose from a return. However, you also lose the actual merchandise, which your customer has no incentive to return. And on top of all that, you’re forced to pay added fees to cover the cost of chargeback administration.
Worst of all, each dispute counts against your chargeback ratio. If your chargeback ratio gets too close to established industry thresholds, your bank could close your account and put you on the MATCH List…potentially dooming your business.
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Difficult Return Process Means More Friendly Fraud
It sounds strange, but encouraging customers to request a refund (vs. chargeback) isn’t a bad idea. It makes more sense if keep this fact in mind: from the customer’s perspective, there’s not much discernible difference between a refund and a chargeback. Buyers aren't interested in complex payments procedures; they just want their money back, and they’ll find a way to get it.
If a buyer thinks it’s too much trouble to work with you for a refund, that person will likely turn to the issuer instead. This is an example of what we call “friendly fraud.”
Roughly 8 in 10 consumers have committed friendly fraud as a matter of convenience. This sets a bad precedent and encourages negative customer behavior--so much so, in fact, that half of all cardholders who commit friendly fraud will do it again within 90 days.
Even in clearly fraudulent cases, however, your odds of successfully disputing a chargeback are still low. The representment process is time-consuming and complicated. Plus, issuers have an incentive to side with the cardholder in a case to make sure their customers remain happy.
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.
10 Tips to Stop Returns WITHOUT Causing Chargebacks
So here's the goal: minimize returns without causing chargebacks to rise in response. But how?
You don't want to take off-putting steps like setting stricter time frames for returns or labeling items as “final sale,” but you don’t want to have no return standards at all, either. Your best bet is to implement proactive behaviors that work to prevent returns before the transaction, not after. These include:
- Quality Control: Source your products from reliable suppliers and authenticate any designer goods before making them available for sale. Selling defective or counterfeit items, even without your knowledge, is the fastest way to lose sales and customer confidence.
- Make Product Descriptions Clear: You want to give customers as much detail about the products as possible, without exaggerating any of the features or benefits. Include useful points like size, color, dimensions, and anything that could provide a clear understanding of the item.
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- High-Quality Images: As they say, “seeing is believing.” A small, pixelated image of the item isn’t going to cut it. Give the customer multiple clear, high-definition pictures that show the item from different angles. This is just as important as a good description.
- An In-Depth FAQ Section: Don’t wait for customers to ask questions. Be proactive and ask for them! Create a detailed FAQ (or “frequently asked questions”) section that provides specific answers on a wide range of topics, with questions organized under relevant subheadings.
- Rapid Response: Data shows that 44% of customers expect a response to email inquiries within four hours. The window of response is even smaller for social media. The best solution is to provide round-the-clock live service across all channels. Overflow call centers are an option when this isn’t possible.
- Watch the Goods: Just as you need to ensure you’re stocking quality goods, you need to be sure they arrive at the customer’s door in the same condition. Package all items carefully, and review each item before it goes out to ensure the right items arrive at the correct destination.
- Note Any Exceptions: If you have any items for which the standard rules don’t apply, such as “final sale” items, be sure the customer is aware ahead of time. Ask buyers to confirm they’re aware of these exceptions before completing a purchase.
- Make Cancellations Easy: If you do business on a recurring billing or subscription model, make it as easy as possible for customers to cancel service. This is a major consideration in the "chargeback vs. refund" comparison: if a customer files a chargeback, the bank may overturn all transactions going back to the beginning of service!
- Track Customer Feedback: Customer reviews are the most direct impressions you can get of your customers’ feelings. Take advantage of it by taking customers’ reviews and using the information to refine and improve processes and policies.
- Turn it Into an Opportunity: Instead of a loss, think of a return as a new chance to convert. For example, you can try offering a 10-20% bonus on merchandise returns if customers will take store credit instead of cash. You’re effectively recovering the sale, and building positive customer relationships, with no extra effort.
Like we mentioned before: when you’re comparing a chargeback vs. refund, there’s really no question which is more harmful. You want to avoid chargebacks whenever you can. Want to learn more about that? Click below and get started today.