The Difference Between a Chargeback and a Refund and How to Avoid Both



If you don’t own a business or have never accepted credit cards from your customers, you might be under the impression that refunds and chargebacks are just two different words to describe the same phenomenon that occurs when a merchant takes money out of their account and returns it to the customer. In reality, the distinction is stark. While both are to be avoided, chargebacks are by far the worse of the two.

What Is a Chargeback?

When a customer initiates a chargeback and it is decided in their favor by their credit card company, you as a merchant are left with no recourse other than to return the money. Although you might feel powerless throughout the dispute process, there are many instances when merchants lose the case simply because they failed to provide the requested documentation by the deadline date imposed by the financial institution. These disputes don’t go away; they need to be addressed as soon as they arise if you are to have any chance of coming out on top.

In addition to being compelled to return the customer’s money, many chargebacks resolved in the customer’s favor also do not require that the goods that were purchased be returned to the merchant. As a result, you might find yourself lighter in your wallet as well as in your inventory.

What Is a Refund?

Although most credit card companies request that customers attempt to resolve the problem with the merchant before going to the next level, many people go straight to the financial institution. This happens for several reasons. For one thing, customers usually are given an automatic, temporary refund by their credit card company, giving them ready access to the cash amount they paid for the item. Of course, it is deducted if the case is decided in the merchant’s favor, but having cash in hand now is often a big lure.

In addition, some customers are not totally honest in their reasons for requesting a refund. Therefore, they would rather skip a discussion with the merchant and let their credit card company do the heavy lifting.

By contrast, the refund process takes place between a customer and merchant with no involvement by the credit card company. Ideally, this is a friendly process that is completed with no hard feelings. In the best case scenario, a once-disgruntled customer who receives stellar and timely attention from you throughout the refund process might end up feeling even better about your business than ever.

As a merchant, you have a good deal of leeway when it comes to refunds. In the clear policy that you set up and publicize, you can offer full money back, a partial refund minus a restocking fee or store credit in lieu of cash. The key is that you must be totally transparent about your policy to avoid confusion and bad feelings.

For merchants, it is a far better course of action to work out a refund with your customer whenever possible. When you do, you can avoid the unpleasant situation that arises when an unhappy buyer resorts to the chargeback process.

Chargebacks should be avoided at all costs not only because they can result in bad blood between you and a customer, but also because they can lead to negative consequences for you and your business. For one thing, chargebacks often mean that you need to pay extra fees to your merchant account provider. Worse still, a repeated pattern of chargebacks might lead your provider to impose restrictions on your account or close it altogether. Therefore, it is far better to voluntarily pay the customer back even if sometimes you need to swallow your pride and objections in order to do so.

Frightening Statistics

Credit cards are ubiquitous these days, but they come with risks both for the customer and the merchant. For sellers, an overwhelming percentage of the chargebacks they experience throughout the lifespan of their business are due to fraud, and the numbers are skyrocketing. In just two years between 2015 and 2017, there was a 51 percent increase in chargebacks due to fraud.

In addition, a little less than 10 percent of chargebacks happen due to merchant carelessness. If your website incorrectly represents the image of a product, for instance, the chances of an unhappy customer who disputes the charge are very high.

A small but significant four percent of chargebacks take place due to customer dissatisfaction with a product. Although this is not always due to something you did or did not do, it is important for you as a merchant to keep track of buyer feedback to gauge which products are successful and which are not.

A far more disturbing statistic is the 41 percent of chargeback-requesting customers who take this step because they never received the product. Even if a small number of these people are lying and actually did get the order they requested, any merchant who experiences a high incidence of these types of chargebacks needs to look at their product delivery process from beginning to end.

Similarly, since a full one-quarter of chargebacks are due to the incorrect product being sent, it behooves any seller in this situation to closely scrutinize their inventory acquisition, tracking, monitoring and shipping processes.

What a Retailer Can Do to Avoid a Chargeback or Refund

First, understand why chargebacks and refunds occur. Carefully review all of the chargebacks you have been slapped with over the past year. Do you see any patterns? Are people consistently getting incorrect products, for instance? If you do identify a trend, take steps to stop it in its tracks.

Second, respond immediately when a customer has a complaint or a concern. Remember, the people who buy your products are the lifeblood of your business. Without them, you will fail, so treat them with the timely attention and respect they deserve. Many a decision to escalate a complaint to the next level has been defused by a manager who listens to the customer, makes sure they understand the customer’s concerns and demonstrates that steps are being taken to address the situation. Even if it ultimately does not end in their favor, the customer will feel that they were heard and acknowledged.

Third, don’t be shy about displaying your return policy. Transparency is the name of the game when it comes to disputes with products. If your policy is prominently visible in-store, online and on the receipt the customer receives, you can refer back to it should a concern arise. In a word, you are covering yourself against any future disagreements.

Fourth, if a customer buys something from your store that is called Daisy’s Flowers and Gifts but the charge on their credit card bill shows up as DFG LLC, the buyer might dispute the charge simply because they don’t recognize the merchant name. Nip that potential problem in the bud by having the same name on your merchant account as you do on your signage and website. If it is different and there isn’t anything you can do about the situation right now, be sure to tell the customer at the time of purchase and, if possible, later via email of the discrepancy.

Fifth, follow best practices set up by the credit card industry and your merchant account provider for all transactions, whether they are card-present at your retail location or card-not-present online or via the telephone. Failure to adhere to these standards can leave you vulnerable to penalties as well as the initial chargeback.

Sixth, be sure the payment processor you choose is reputable. The company should always upgrade their equipment and software as soon as updates are released. The company should take steps to protect both you and your customers against fraud by adhering to all industry security standards. Furthermore, customer service representatives should be available to answer any questions or concerns you have in a timely fashion. If there is no live help available, they should at least offer chat or email support in real time. With these safeguards in place, many instances of fraud-based chargebacks can be stopped before they affect your business.

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