Chargebacks vs. refunds

Customers seeking money back from a purchase made online typically have two options at their disposal. One is to request a refund. The other is to initiate a chargeback. Both create pain for businesses, but chargebacks are particularly costly with fees sitting between $30 and $50 per chargeback, plus the resources needed to fight illegitimate claims.

In this article, we go back to basics to explain the differences between chargebacks and refunds from a merchant's perspective. We'll look at whether chargebacks and refunds are easier for merchants to handle. Plus, we provide tips for dealing with double refund chargebacks. Specifically, we cover:

• What's the difference between chargebacks and refunds?
• Are chargebacks or refunds better for merchants?
• Why did I get a chargeback instead of a refund?
• What are double refund chargebacks?
• How can businesses reduce the risk of chargebacks and refunds?

Looking to understand how machine learning and advanced rules can help you prevent chargeback fraud? Learn more about Fraud Detection Pro.

What's the difference between chargebacks and refunds?

The terms 'chargeback', 'refund' and 'reversal' are often confused and conflated. Yet they have specific meanings in the card industry.

• A chargeback is a return of funds to a customer's card account after they dispute a card payment on their statement.
• A refund is a repayment of a sum of money.
• A reversal revokes a previous transaction. Businesses must process a payment reversal if they don't receive an authorization response. Or if a card transaction is subsequently voided or canceled.

The main differences between chargebacks and refunds are who the cardholder contacts in the first instance, the length of the process and its cost.

First contact: For chargebacks, the cardholder contacts their card issuer. The issuer then creates a formal dispute case via the relevant card scheme. For refunds, the cardholder contacts the merchant directly to request a refund. What happens next depends on the merchant's refund and returns policy.

Time: Depending on its value and whether the merchant challenges the claim, it can take a few days to several months to dispute a chargeback. In cases of refunds it typically takes a few days at most, and the merchant is confident of their financial exposure when they grant the refund.

Cost to merchant: Banks initiate chargebacks at the request of the cardholder, and are responsible for retrieving the funds from the merchant’s account and returning them to the customer. In contrast, a refund involves the merchant voluntarily repaying their customer.

Reputation: Chargebacks pose a greater reputational risk to merchants than refunds. That’s because, while refunds are monitored, they are generally the result of a direct resolution between customer and merchant and are considered low risk. Chargebacks, on the other hand, require a more costly and convoluted process to resolve, and can be a result of fraud. Because of this, they are monitored, and merchants with consistently high chargeback ratios face being put on programs until they can reduce them.

Revenue loss: In both cases, the merchant loses the sale, as well as processing fees for the original transaction. However, merchants can also be charged additional fees for chargebacks, and can face financial penalties if they fail to get their chargeback ratios below certain thresholds.

Expertise: As a result of their complex and costly nature, chargebacks require a significant degree of expertise to facilitate, including comprehensive knowledge of the regulations, processes, and possible penalties involved. Refunds are relatively simple, and can be resolved between merchant and customer with no need for involvement from any other party.

Learn more: How to manage and optimize returns to reduce disputes and chargebacks

Are chargebacks or refunds better for merchants?

Neither chargebacks nor refunds are ideal, as both arise because of customer dissatisfaction.

However, refunds could be seen as better for merchants because they are quicker and cheaper to administer. Merchants save the time, effort and cost of responding to dispute notifications, gathering compelling evidence to challenge chargebacks.

Refunds are also within the merchant's control. They can offer the customer alternatives, such as vouchers or equivalent goods. Or apply conditions like time limits or stipulate that customers return goods for re-sale. Whereas with chargebacks, the process, time limits and conditions are out of a merchant's control.

Generally, cardholders don't return goods or services following an unsuccessful chargeback, especially if they haven't dealt with the merchant directly. This leaves merchants out of pocket on the cost of the sale, any fulfillment costs, plus chargeback fees.

Finally, a fair refund process can extend the lifetime value of a customer. Research shows that satisfying dissatisfied customers makes them even more loyal to a business than if they had never experienced a problem.

Learn more: Chargeback pre-arbitration & arbitration explained

Why did I get a chargeback instead of a refund?

There are several reasons customers may go directly to their card issuer to resolve a disputed payment. Most often, this is because customers don't recognize the purchase on their statement, so they're unsure who else to contact.

Businesses can prevent this by using clear billing descriptors, which flow through to customer statements—and choosing a business name that's likely to be most familiar to customers if the business's registered and trading names differ.

Businesses should also make it easy for customers to resolve queries in the first instance by providing their contact details. This can be a customer service telephone number or email address in the 'city' field on the cardholder statement.

Another common reason for chargebacks over refunds is if a customer has been a victim of fraud. There may be multiple unauthorized transactions on their statement. Rather than contact each merchant individually to request refunds, they simply contact their issuer for one-stop resolution.

There's also so-called chargeback fraud when a legitimate customer claims they don't recognize or didn't make a card purchase. They then keep the goods or benefit from the service purchased without paying for it. This is sometimes known as 'first-party fraud' or 'friendly fraud' and results in a chargeback instead of a refund.

What are double refund chargebacks?

Double refund chargebacks happen when the cardholder contacts their issuer and the merchant about a disputed transaction.

The merchant approves a refund, and the issuer initiates a chargeback via the relevant card scheme. This results in the merchant losing out twice: on the refund cost and the chargeback. This is in addition to any chargeback fees from their acquirer.

To prevent double refund chargebacks, refund promptly and inform customers how long it typically takes for refunds to appear on their account. These steps may stop customers from thinking there's a problem and initiating a chargeback.

Learn more: What is chargeback representment?

How can Checkout.com help businesses reduce the risk of chargebacks and refunds?

No business can ever wholly eliminate disputed transactions or chargebacks. One of the best ways to avoid the risks is to prevent chargebacks from occurring in the first place.

Learn how you can recover revenue lost from chargebacks with Checkout.com's Fraud Detection Pro, and Rapid Dispute Resolution (through Checkout.com in partnership with Verifi).

Fraud Detection Pro utilizes dynamic machine learning and flexible and merchant-created tools to block fraud, spot fraudulent trends, and continually improve its fraud-fighting capacity. You can also use preset configurations to go live quickly or completely customize your risk setup to your needs and goals.

And with Rapid Dispute Resolution, you can automatically credit a customer's card at the pre-dispute stage, resolving the issue before it becomes a chargeback. This means you can avoid painful fees and they won’t contribute to your chargeback ratio.