You might think that chargebacks and refunds are essentially the same. However, in practice, they are quite a bit different. Merchants will want to reduce both chargebacks and refunds, but in some ways, chargebacks are a bigger risk as they can be more expensive in both the short-term and long run. We’ll take a closer look at the differences between chargebacks vs refunds, but should you need assistance or have questions, feel free to reach out to the ChargebackHelp team.
Chargebacks vs Refunds Explained
A chargeback is essentially a reversed credit or debit card payment. Money is taken from a merchant’s account with an acquiring bank and returned to a cardholder. The merchant doesn’t have control over this process, and ultimately, it’s up to the card-issuing bank to decide whether to approve a chargeback. However, merchants can fight chargebacks through “representment” (more on that later).
A refund likewise involves returning funds to a customer. In exchange, the customer will often give the purchased product back to the merchant. With chargebacks, the cardholder may not need to return the purchased goods or services. For cardholders, this makes chargebacks better than refunds, if anything, and some fraudsters actually use chargebacks to defraud merchants.
Let’s take a closer look at some of the specific differences between chargebacks vs refunds.
Chargeback and Refund Initiation
Customers usually initiate the refund process by contacting the merchant. Ultimately, the refund process is under the control of the merchant, including not just whether to issue a refund, but also the general timeline, if goods need to be returned, and if the customer will need to pay any sort of restocking fee.
With chargebacks, the cardholder will usually contact their card-issuing bank first. The bank will then contact the merchant’s acquiring bank, which will in turn contact the merchant. In some cases, a customer may contact a merchant first and let them know that they are considering filing a chargeback. However, at this stage, the chargeback process hasn’t actually started, so the merchant may be able to head it off.
More Parties Are Involved in Chargebacks
Refunds are typically limited to the customer/cardholder and the merchant. With a chargeback, you can expect at least four parties to be involved. In addition to the merchant and cardholder, the merchant’s acquiring bank and the cardholder’s card issuing bank will also take part. In some cases, card networks and other stakeholders may also become involved in a chargeback dispute.
Chargebacks Can Take Much Longer to Resolve
A refund can be settled in a matter of minutes. With chargebacks, the process may play out over several days or even weeks, assuming that the merchant decides to dispute the chargeback through what’s called “representment.” During representment, both the cardholder and merchant will re-present the transaction to the card issuing bank.
With credit card chargebacks, the cardholder is typically provided a provisional credit while the dispute plays out. The merchant, meanwhile, won’t be able to access the funds until after they win the chargeback dispute. At the end of the representment process, the card-issuing bank will rule either in favor of the cardholder or the merchant. With refunds, the merchant can decide whether or not to offer a refund.
The True Cost of Chargebacks is Often Higher Than Refunds
For merchants, chargebacks can be more costly than refunds. Not only could the merchant lose the revenue in dispute (which they’ll also lose if they provide a refund), they will have to pay chargeback fees. These fees typically cost between $20 to $100 and are tacked on top of the lost revenue.
That said, there are some scenarios in which going the chargeback route could end up costing a merchant less than a refund. Let’s say a customer buys a $1,000 handbag and then tries to file a chargeback. If the merchant can win the chargeback dispute, they’ll get to keep the revenue from the sale ($1,000 in this case). So if the merchant has strong proof that the purchase was legitimate, in this case, it’d be wise to fight the chargeback.
Crucially, even if the merchant wins the chargeback dispute, they will still have to pay chargeback fees. On top of penalties from banks, card networks themselves may place merchants hit frequently with chargebacks in monitoring programs that come with additional fees and penalties.
Merchants Must Monitor Their Chargeback Ratio
Merchants hit with chargebacks will also have to deal with a rising chargeback ratio. If the ratio gets too high, their acquiring bank may drop them or start to charge higher fees for processing and accepting payments. In some cases, merchants may have to work with banks that specialize in servicing high-risk businesses. Unfortunately, such banks often charge higher fees.
Refusing Refunds Results in More Chargebacks
Refunds are bad for businesses. As such, some businesses simply decline to offer a refund process or make it difficult or expensive to use. Unfortunately, however, this can result in more chargebacks.
If a cardholder reaches out to request a refund but the merchant declines, the cardholder may then simply turn to their bank to ask for a chargeback. Likewise, if there is a hefty restocking fee or expensive shipping that the customer is expected to pay for, they may skip asking for a refund altogether and may pursue a chargeback.
From the cardholder’s point of view, since both chargebacks and refunds will result in their money being returned, they’ll often take the easier or cheaper route, skipping refunds for chargebacks. This means merchants will typically want to offer an easy refund process.
Take Away: It’s Crucial to Avoid Chargebacks and Reduce Refunds
Merchants will want to reduce both chargebacks and refunds. This can be done through setting proper customer expectations and various other tactics. Some tools, such as chargeback alerts, can be used to prevent chargebacks. A chargeback alert will warn you of a pending but not yet filed chargeback. Then you can offer a refund before the chargeback is filed, thus preventing chargeback fees and protecting your chargeback ratios.
If there’s no chance a merchant can win the chargeback dispute, say because a purchase was clearly made with a stolen credit card, then offering a refund rather than getting hit with a chargeback is preferable. With a chargeback, the merchant still loses the revenue from the sale, and will also get hit with additional fees and a rising chargeback ratio. In these cases, it’s better to cut losses by issuing a refund.
It’s important for merchants to pay close attention to chargebacks vs refunds. Managing chargebacks can be resource-consuming but the tools offered by ChargebackHelp go a long way. Many measures to prevent chargebacks and fraud can also reduce refund request rates as well, thus protecting a merchant’s bottom line.