Chargebacks vs Refunds: What's the Difference?

Chargebacks vs Refunds-What's the Difference

Table of Contents

  1. Why Do Some Problematic Transactions Become Chargebacks Instead of Refunds?
  2. What If a Single Transaction Results in Both?
  3. What is a Double Refund Chargeback?
  4. How To Steer Customers Toward Refunds and Away From Chargebacks
  5. Conclusion
  6. Frequently Asked Questions

To the casual observer, the difference between a chargeback and a merchant-initiated refund might seem trivial.  The same dollar amount comes out of the merchant's account, either way, so is one really worse than the other?  Of course, any merchant who's had to deal with chargebacks firsthand knows the answer to this.
Aside from the fact that chargebacks often come with additional fees, banks and card networks hold chargebacks against merchants.  Too many chargebacks can mean the imposition of restrictions and possibly even the loss of your merchant account.  A voluntary refund, however, is strictly a matter between the merchant and the customer.  When you've got a customer, who has a legitimate problem with a purchase they've made, it's always better to give them a refund rather than leave them with no alternative but to file a chargeback.
Why Do Some Problematic Transactions Become Chargebacks Instead of Refunds?

Customers are supposed to ask merchants to resolve their issues before they get their bank involved and request a chargeback.  

New call-to-actionOftentimes, this is the first thing their bank will ask them before they get the ball rolling on the chargeback process.  Sometimes, the customer has made a genuine effort to work things out with the merchant, but due to disagreements, miscommunications, or delays, they may feel like the merchant isn't going to give them the outcome they're looking for.  Other times, the customer might go to their bank first out of expediency, or because they don't intend to be entirely forthcoming about the nature of their complaint.  These scenarios may include "friendly fraud"—situations where a customer has a transaction reversed via the chargeback process even though they did, in fact, get what they paid for.

When a customer does do what they're supposed to do, and contact the merchant before asking for a chargeback, the best way to prevent that chargeback from happening is to listen, try to understand the nature of their complaint, and work out a solution that satisfies them—which, most of the time, will mean refunding their money.  Losing out on revenue in this way might not be the optimal outcome for the merchant, but it's far better than ending up with a chargeback that might cost them the same amount of revenue anyway—plus fees

What If a Single Transaction Results in Both?

One risk of a generous return and refund policy is the possibility of double refunds.  This can be a big problem for a merchant when it occurs since it means you're out twice the amount of the original transaction.  

What is a Double Refund Chargeback?

Double refund chargebacks occur when customers contact both the merchant and their bank about a disputed transaction; the merchant approves a refund while the bank initiates a chargeback.

This can happen when a merchant is unaware that a chargeback process has started, or when a customer reaches out to their bank when a promised refund isn't processed immediately. 

Asking good questions can help you reduce the chance of getting hit with a double refund.  When a customer asks for a refund, it's always smart to ask if they've contacted their bank already.

If they have, the merchant can follow up with the bank to see if the customer's complaint has already advanced to the chargeback stage.  Once it reaches that point, the damage is already done and giving the customer a refund greatly increases the chance of a double refund occurring.

One bit of good news is that when you receive notice that a chargeback has been filed against a transaction you've already refunded, you're in a good position to successfully dispute that chargeback by providing proof of the refund.

How To Steer Customers Toward Refunds and Away From Chargebacks

As always, a merchant's first and best line of defense against chargebacks is a well-trained staff that communicates policies clearly and provides excellent customer service.  

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyCustomers who don't intend to commit fraud, "friendly" or otherwise, can usually be encouraged to seek resolution of their issues through the merchant directly if they expect to be heard fairly, treated well, and presented with options that meet their needs.

You will encounter customers who have unrealistic expectations and/or unreasonable demands.  In those cases, you have a judgment call to make as to whether it's better for your business to stand your ground on principle or give them a refund just to avoid a chargeback.  In a situation where you know the customer is not presenting legitimate grounds to reverse a transaction, and you aren't in imminent danger of exceeding your bank's chargeback ratio, it might be worth it to deny the refund and fight any resulting chargeback.

Why Would Merchants Favor Giving Refunds Rather Than Chargebacks?

Given their differences, you might be tempted to think that it doesn't matter one way or another. Or, more antagonistically, you might think that it is worth going through the chargeback process so that you fight any disputes.

The reality is that a merchant almost always wants to give a refund before going to chargeback and representment. Here are some of the reasons:

A refund will save you your customers. If a customer had a bad experience, or is confused about their transaction, it's best to give a refund before they turn to their bank or creditor. You'll avoid the negative impact to your reputation as well as arduous process of a chargeback. With transparent and supportive customer service, you'll earn customers and make money. 

Chargebacks hurt you even if you win. Once a chargeback happens, it impacts your ratio whether you successfully dispute it or not. That ratio is your standing with credit card networks and how easily you can accept payments. And a poor ratio signals that you are a high-risk merchant to these networks.

Refunds can save you money. if you are getting chargebacks, you are paying for the lost revenue and overhead of the transaction (if you fail) as well as fees and management costs (no matter what happens). 

This is why Chargeback Prevention Alerts exist. These tools will give you an alert about a pending chargeback and, if possible, pause the dispute process so that you can reach out directly to the customer to offer a refund of their transaction and settle and customer service issues. 



When that happens, you'll want a chargeback management company to have your back, dealing with the back-and-forth of the chargeback process and using their combined years of experience and knowledge to protect your hard-earned revenue while you focus on growing and operating your business.


What happens during a chargeback?

A chargeback is a forced reversal of a transaction taken from the merchant’s bank and credited to the cardholder’s account. The merchant can dispute this action through the credit network and issuing bank.


What is a Chargeback Prevention Alert?

Chargeback prevention alerts pause the chargeback process to give you a chance to rectify a situation with a full refund rather than a chargeback. Ethoca and Verifi are the two major providers of these services.


Do banks really investigate disputes

Yes. However, because of law and custom rservice banks tend to favor customer claims of fraud. With digital fraud and identity theft so common, this is for the benefit of the consumer.

Are you looking to stop chargebacks and protect your revenues?  If so, you must first take steps to understand the problem.  Download the free Chargebacks 101 Guide to better understand the causes of chargebacks, and how the overall chargeback process works, so you can fight customer chargebacks and prevent them in the first place.

Get the guide, Chargebacks 101: Understanding Chargebacks & Their Root Causes