Chargebacks vs Refunds: What's the Difference?

Table of Contents

1. What's the Difference Between a Chargeback and a Refund?
2. Why Is it Better to Issue a Refund Than Deal With a Chargeback?
3. Why Do Some Problems Become Chargebacks Instead of Refunds?
4. How Can Merchants Steer Customers Toward Refunds and Away From Chargebacks?
5. What Is a Double Refund Chargeback?
6. The Advantages of Chargeback Management
7. What Happens During a Chargeback?
8. What Is a Chargeback Prevention Alert?
9. Do Banks Really Investigate Disputes?

From a customer's perspective, refunds and chargebacks often seem like basically the same thing. If the merchant won't give them a refund, they can simply ask the bank to get them their money back instead. From a merchant's perspective, however, chargebacks and refunds are two very different things.

Because of these differences, it's often correct for merchants to issue a refund preemptively just to avoid a future chargeback. Even if the merchant feels a refund isn't warranted, the consequences of a chargeback can be significant enough to tip the scales toward granting one anyway. What are the major differences between refunds and chargebacks, and how can merchants prevent chargebacks through the use of refunds?

Chargeback fees can cost anywhere from $20 to $100. The amount of the fee depends on the payment processor and their evaluation of the merchant's level of risk. Merchants in high-risk industries will typically pay higher chargeback fees.

If a merchant's chargeback ratio exceeds certain thresholds, often around 0.9%-1%, it can result in serious consequences. These can include fines, higher fees, higher reserve requirements, or even the termination of a merchant's account.

When a customer 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. In some cases it can even be preferable to refund a customer who you're not sure has a legitimate problem, just to avoid a likely chargeback.

Let's go into more detail on why it's usually correct for merchants to err on the side of issuing refunds:

• Chargeback costs: Refunds can save you money. If you're getting chargebacks, you're paying for the lost revenue and overhead of the transaction if you fail, as well as fees and management costs no matter what happens.
• Chargeback ratio: Chargebacks hurt you even if you win. Once a chargeback happens, it impacts your ratio whether you successfully reverse 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.
• Customer service: A refund can 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 on your reputation as well as the arduous process of a chargeback. With transparent and supportive customer service, you'll earn customers and make money.

The advantages of giving a refund to customers who might otherwise file a chargeback are 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. There are also tools available to issue automatic refunds to customers seeking to dispute a charge, depending on criteria set up by the merchant.

Customers are supposed to ask merchants to resolve their issues before they get their bank involved and request a chargeback. Oftentimes this is the first thing banks will ask a customer who wants to dispute a charge.

Sometimes the customer has made a genuine effort to work things out with the merchant, but feels like the merchant has been uncooperative and isn't going to refund their purchase. Other times, the customer might believe that the merchant intentionally tricked them or ripped them off, and contacting them would be a waste of time.

In some cases, 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 what they're supposed to do and contacts 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 ideal outcome for the merchant, but it's far better than ending up with a chargeback. When factoring in all fees and related costs such as customer service and acquisition, a chargeback can often cost a merchant more than twice the original transaction amount in total.

Customers who don't intend to commit fraud can usually be convinced to resolve their issues through the merchant directly if they expect to be treated fairly and presented with options that meet their expectations.

You will occasionally encounter customers who have unrealistic expectations or unreasonable demands. In these cases, you have a judgment call to make. You can stand your ground on principle, or you can give them a refund just to avoid a chargeback.

In a situation where you know the customer doesn't have legitimate grounds to reverse a transaction and you aren't in danger of exceeding your chargeback thresholds, it might be worth it to deny the refund and fight any resulting chargeback.

You may also want to accept the possibility of a chargeback in cases where the customer is demanding a refund for a high-value purchase without a legitimate reason. So long as you're confident you have the compelling evidence needed to win representment, it may be correct to deny the refund and accept the risk.

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 a good idea 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.

In addition, the major card networks have taken several steps to reduce the chances of double refund chargebacks occurring. One of these efforts is the purchase return authorization mandate, which changed how return payments to customers are handled.

Under the new system, a customer will see the return payment as a pending credit to their account rather than having to wait until the transaction is fully processed. This reduces the likelihood of a customer filing a chargeback because they don't believe the return payment is coming.

Card networks have also advised banks to make every effort to ensure that a transaction hasn't already been refunded before they file a chargeback at the cardholder's request.

Combined with return authorization, this has mostly eliminated the scenario in which a chargeback is processed regarding a transaction for which the merchant has already issued a refund. As long as the merchant checks for chargebacks before issuing refunds to customers, then, double refund chargebacks should be extremely rare.

The Advantages of Chargeback Management

The world of chargebacks is a complicated one, but you don't have to wander through it without a guide. A professional chargeback management firm can help you figure out what chargeback and fraud prevention tools would work best for your business, and handle the often-complicated process of setting up these tools and systems.

In addition, almost every business will have at least some chargebacks they'll need to fight, whether because the circumstances are such that they don't want to issue a refund, or because they never got the chance to do so.

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 years of experience and knowledge to protect your hard-earned revenue while you focus on growing and operating your business.

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