Return Item Chargeback - Definition & Explanation

Table of Contents

1. What are return item chargebacks?
2. Why don't merchants need to worry about return item chargebacks?
3. What about chargebacks from returned items?
4. Know your chargebacks
5. What is a return item chargeback?

When you start to take fighting chargebacks seriously, you begin to find that there are many different kinds of chargebacks besides the familiar ones that result from credit card transactions. Or rather, that there are a number of disparate things that share the name “chargeback.” Different payment schemes like PayPal and ACH do have their own chargeback equivalents, but one type of chargeback that you may have heard of isn’t tied to any specific platform, and isn’t the same as a credit or debit card chargeback: The return item chargeback. How worried do merchants need to be about return item chargebacks?

We won’t draw out the suspense. The answer is, not at all. Return item chargebacks aren't typically a major issue for merchants, and these days they've very nearly disappeared entirely. They won’t significantly impact a merchant’s revenue, and won't have any impact on their chargeback rate or their reputation with customers.

You don’t need to include them in your chargeback defense strategies or look into third-party tools designed to prevent them. The only thing return item chargebacks have in common with credit card chargebacks is the name. As confusing as it may be, these two types of chargebacks have nothing to do with one another.

You can breathe a sigh of relief whenever you hear something about return item chargebacks, but it is always a good idea to investigate further when you hear a chargeback-related term you aren’t familiar with.

Novel payment schemes breed novel forms of fraud, and to maintain consumer confidence there has to be some way to claw back unauthorized payments—which may or may not be called “chargebacks.”

It can get confusing, but the important thing is to keep your eyes and ears open and thoroughly research any new type of payment you’re thinking about accepting.

What are return item chargebacks?

Merchants who have experience with the old brick-and-mortar store days when customers would frequently pay with personal checks might remember the old signs above the cash register, warning customers that anyone who bounced a check would incur a fee. This fee wasn’t just a deterrent—while the person who wrote the bad check always gets hit with a significant fee from their bank, the party that deposited the bad check gets a small financial penalty from their bank, too.

The check bouncer’s fee is typically called a “Non-Sufficient Funds” or NSF fee, while many banks refer to the depositor’s fee as—that’s right—a return item chargeback. Why choose a name so closely associated with a completely different and contentious process? You’ll have to ask the banks.

Note that not every bank calls it by this name, but nearly all consumer banks have this type of fee, typically around $10 to $15, which they charge any time the customer cashes or deposits an item that ends up getting returned unpaid to the bank.

Why don't merchants need to worry about return item chargebacks?

Merchants can still incur return item chargebacks when their customers pass bad checks off on them, but not every merchant accepts personal checks, and these days the vast majority of customers don't use them either, preferring the convenience of more modern payment methods. In addition, merchants have legal remedies they can pursue against customers who pay with bad checks.

While merchants have no great cause to fear actual return item chargebacks, some people who've heard the term but misunderstood what it means might incorrectly use “return item chargeback” to refer to credit card chargebacks that involve disputes over product returns

There are chargeback reason codes that specifically relate to returns: “Credit Not Processed” and “Credit Not Received” refer to situations where the cardholder has returned an item, or the item was damaged or missing, and the merchant will not issue a refund. Less straightforward return-related disputes may come through on other reason codes.

What about chargebacks from returned items?

This is a good time to remember how important a flexible, customer-friendly refund policy can be when it comes to preventing chargebacks. It’s never worth refusing a refund only to have it turn into a chargeback down the line. The refund will always cost you less, take less of your time and labor, and can help maintain a good relationship with a customer you may still want to do business with. Of course, if the customer's actions are such that you don't want to do business with them again, you can always issue a refund and then add that customer to your blacklist.

Refunds don’t come with fees attached like chargebacks do, and they don’t increase your chargeback rate.

It should always be easy for customers to reach you via phone or email to report an issue and request a refund. If a customer abuses a generous return policy you can always refuse further business with them, but stonewalling a customer who is trying to work out a problem directly with you is a recipe for unhappy customers and lots of chargebacks.

The costs of allowing customers to leave unhappy has also increased drastically in the internet age, with more and more potential customers looking up online reviews of a business, product, or service before making a purchase. If your stringent refund policy is leaving customers unsatisfied with their purchase, you can end up with bad reviews posted online, which can influence potential customers to go somewhere else.

Even if they found your product or service unsatisfactory, a customer who received a refund is much less likely to complain or leave negative reviews online.

Sometimes cardholders get impatient and assume a refund isn’t coming when, in reality, the merchant simply hasn’t gotten around to processing it. When you agree to provide a refund, it's best to process the credit promptly, or at least give the customer a realistic timeline about when they can expect it. It can also help to ask them to give you an email address or phone number you can call or text to let them know when you’ve processed their refund.

Assuring customers that their refund is coming is easier for merchants who comply with Visa's purchase return authorization mandate. When merchants the process Visa has laid out, customers will see the refund as a pending credit to their account almost immediately after the transaction is submitted, rather than having to wait days for it to be fully processed. This can prevent confused customers from calling their bank when they don't see their payment refunded right away.

Just be careful not to issue a refund once a dispute has progressed to the chargeback phase. At that point, issuing a refund is almost certainly going to put you in a double refund situation where you’re out twice the money—once from the chargeback, and again from your own refund—plus all the chargeback fees.

Know your chargebacks

Dealing with chargebacks can be confusing and challenging enough without misleading nomenclature getting into the mix, but here we are. Know that actual return item chargebacks aren’t anything related to your credit card chargebacks, but don’t tune out the conversation if you hear anybody bringing them up in relation to your business—there’s a chance they’re just using the wrong term to talk about the dangerous kind of chargeback.

When the ever-changing world of chargebacks gets overwhelming, remember that there are experts who can help you navigate the jargon, the definitions, and all the payment platforms new and old, helping you develop and execute strategies to cut down your chargebacks and avoid future disputes. Many anti-chargeback strategies also have a notable side effect: They increase customer satisfaction and loyalty. The methods discussed above for preventing refund-related chargebacks can generate loyalty and repeat business when customers see that you’re willing to listen, take their concerns seriously, and do what must be done to resolve them.

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