Chargeback vs Refund: Key Differences and What They Mean for You

Chargeback vs Refund: Key Differences

The table below highlights the key differences between refund and chargeback –

	Chargeback	Refund
Definition and Purpose	A chargeback is initiated by the customer through their bank, usually when they are unhappy with a product or service or when they suspect an online payment fraud.	A refund is initiated by the merchant, usually when the customer requests it.
Initial Contact Point	A chargeback involves the customer contacting their bank, which then engages the card network. The card network connects with the merchant’s bank, and ultimately, the merchant is notified.	In the case of a refund, the customer directly contacts the merchant.
Duration of the Process	A chargeback can take up to 120 days or more to resolve, depending on the reason for the dispute.	Depending on the merchant’s policies and the payment method, a refund can be processed within a few days.
Cost Implications for Merchants	Chargebacks result in added expenses for merchants, including processing and dispute fees.	Unlike chargebacks, refunds do not typically entail extra fees.
Reputational Impact	A chargeback can damage a merchant’s reputation, indicating a dissatisfied or defrauded customer.	A refund can preserve or even enhance merchant’s reputation, as it shows a willingness to accommodate the customer’s needs.
Revenue Loss and Associated Fees	A chargeback results in loss of sale/product/service, and the chargeback fee.	A refund results in loss of sale/product/service only.
Expertise and Complexity	A chargeback requires you to understand the chargeback process, the card network rules, and the evidence needed to dispute the claim.	The refund process is relatively simple.

 

By understanding these differences, you can implement strategies to reduce the occurrence of both types of instances. It protects your bottom line and preserves your reputation.

Examples of Refunds and Chargebacks

Refund Example:

A customer purchases a pair of shoes online but finds them to be the wrong size upon receiving the order. They contact the retailer to request a return and refund. The retailer issues a refund to the customer’s original payment method, and the customer receives a credit or the money back in their account.

Chargeback Example:

A customer’s credit card is fraudulently used to make a purchase. The cardholder disputes the transaction with their bank, initiating a chargeback. The merchant must provide evidence to the bank to prove the legitimacy of the transaction. If the merchant is unable to provide sufficient proof, the chargeback is approved, and the funds are returned to the customer’s account, while the merchant incurs fees and potential penalties.

How Do Refunds Work?

Card refund requests can arise from various scenarios. A customer might purchase an item that doesn’t match its description or fails to meet expectations. Sometimes, accidental purchases occur, or a customer might be double-charged due to a technical glitch. 

Here are the steps involved in the refund process –

Refund request

The customer contacts the merchant to request a refund, usually citing a reason such as product return, order cancellation, or purchase error.

Merchant verification

The merchant verifies the purchase and the reason for the refund.

Refund initiation

The merchant processes the refund through the payment gateway or directly to the customer’s payment method.

Refund processing

The payment processor or bank credits the refunded amount back to the customer’s account. Usually within 5-10 working days.

Read More: Why Do Refunds Take Time to Reach Customers?

How do Chargebacks Work?

Chargebacks can stem from unauthorized use of a card, dissatisfaction with a product or service, billing errors, or non-delivery of goods.

The chargeback process often involves the following steps:

Dispute initiation

The cardholder contacts their bank to dispute a transaction, citing reasons such as unauthorized use, merchandise not received, or item not as described.

Investigation

The issuing bank investigates the claim and may request additional information from the merchant.

Chargeback issuance

If the bank finds the dispute valid, a chargeback is issued, reversing the funds from the merchant’s account to the cardholder’s account.

Merchant response

The merchant has a limited time to dispute the chargeback by providing evidence to support the transaction.

Resolution

The issuing bank reviews the evidence and makes a final decision, either upholding or reversing the chargeback.

It’s important to note that chargebacks can have significant financial and reputational consequences for businesses. Therefore, implementing robust fraud prevention measures and providing excellent customer service are crucial to minimizing the risk of chargebacks.

Read More: Chargeback Mitigation: 5 Best Practices to Reduce Fraud

Which is More Profitable for Merchants: Chargebacks or Refunds?

Both chargebacks and refunds arise from customer dissatisfaction, yet they carry distinct implications for merchants. When evaluating which option is more beneficial, you must weigh several factors, including financial impact, customer relations, and operational efficiency.

Usually, refunds are considered better for merchants, owing to the following reasons –

1. Speed and Cost-Effectiveness

Refunds are faster and cheaper than chargebacks. They allow you to handle the dispute directly with the customer without involving the bank or the payment processor. This reduces the fees and penalties you have to pay for chargebacks. The process of raising a grievance is usually mentioned on the merchant website under the section Dispute Resolution Guide.

2. Control Over the Process and Flexibility in Offering Alternatives

Refunds allow you the opportunity to offer alternatives, such as exchanges, credits, or discounts to the customer. This way, you can save sales and maintain a healthy relationship with the customer, which could lead to repeat purchases and referrals.

Chargebacks, on the other hand, have several disadvantages. You have little or no say in the outcome, and they are more expensive and time-consuming than refunds. You need to pay fines and administrative costs, in addition to losing the product and the revenue from the sale. Chargebacks can also tarnish your credibility.

3. Customer Retention

Customers who receive refunds are more likely to shop again and recommend you to others. 

To avoid chargebacks, you can use chargeback prevention alerts and notifications from credit card networks or third-party services informing you of a pending chargeback. You can contact the customer and offer a refund before the chargeback is finalized.

You can also use tools to issue automatic refunds based on predefined criteria, such as the amount, product, or reason for refund.

When to Choose a Chargeback Over a Refund (and Vice Versa)

Understanding when to pursue a chargeback or request a refund is essential for both consumers and businesses.

Guidelines for Consumers

Choose a chargeback when:

• You believe a transaction is fraudulent.
• You did not receive the purchased goods or services.
• The product or service is significantly different from what was advertised.
• You have attempted to resolve the issue with the merchant but received no satisfactory response.

Request a refund when:

• You are dissatisfied with a product or service but believe the merchant will resolve the issue without dispute.
• The merchant offers a clear return or exchange policy.
• You have a good relationship with the merchant and expect a positive resolution.

Advice for Businesses

• Prioritize refunds: Strive to resolve customer issues promptly and amicably through refunds to prevent chargebacks.
• Implement strong fraud prevention: Detect and prevent fraudulent transactions to minimize chargeback risks.
• Clearly communicate return policies: Ensure customers understand the terms and conditions for returns and refunds.
• Dispute unjustified chargebacks: If a chargeback is unjustified, gather evidence to support your case and contest the chargeback.

By understanding the nuances between chargebacks and refunds, both consumers and businesses can make informed decisions and protect their interests.

What Are Double Refund Chargebacks?

Double refund chargebacks occur when both the cardholder and the merchant are involved in a disputed transaction.

For example, a customer may request a refund for a product or service they are unsatisfied with. While you may agree to process the refund, the customer may still contact their card issuer to initiate a chargeback, claiming that they did not receive the product or that it was defective/fraudulent. This results in you losing both the refund amount and the chargeback amount, as well as paying chargeback fees to the acquirer.

You may also have to face higher processing rates, penalties, or even merchant account termination if you exceed the acceptable chargeback ratio set by the acquirer or card network.

To prevent double refund chargebacks, you can take some proactive measures, such as:

• Provide prompt refunds to minimize the chance of customer dissatisfaction and chargeback requests.
• Inform customers about the refund processing times and policies, and send confirmation e-mails or messages when the refund is completed.

10 Steps Merchants Can Take to Prevent Both Refunds and Chargebacks

Both refunds and chargebacks can hurt your reputation, revenue, and cash flow. Therefore, it is essential to take proactive steps to prevent them.

1. Quality Control

Ensure that the products you sell are of high quality. Provide a warranty or guarantee to assure customers of your quality standards.

2. Accurate Product Descriptions

Provide detailed descriptions of the products on your website and other channels. Include all the relevant information, such as features, specifications, dimensions, materials, and instructions. Avoid exaggerating or misleading claims.

3. High-Quality Images

Use high-quality images that showcase your products from different angles. If possible, allow customers to zoom in.

4. In-Depth FAQs

Create a comprehensive FAQ section on your website. Include information about your shipping, delivery, return policy, and refund and chargeback policies and procedures.

5. Rapid Response

Use multiple channels to respond to the queries, complaints, and feedback of your customers. Be quick and professional. 

6. Proper Handling

Carefully handle your products and pack them properly to prevent damage or loss during transit. Use reliable and reputable shipping and delivery services.

7. Easy Cancellations

 Allow customers to cancel their orders easily and without any hassle or penalty. Provide clear and simple instructions on how to process the cancellation promptly.

8. Upfront Information

Provide your customers with all the necessary information before they complete their purchase. Inform them of the total cost of their order, including any taxes, fees, or shipping charges. 

9. Exception Indicators

Verify your customer’s identity and payment methods. Use CVV, AVS, 3D Secure, and other security features to reduce the risk of unauthorized or disputed charges. 

9. Chargeback Alerts

Subscribe to a chargeback alert service that notifies you of any chargeback requests or disputes initiated by your customers or their banks.

Legal Implications of Chargebacks and Refunds

Consumer Rights

Indian consumers are protected under the Consumer Protection Act, 2019 which provides for rights such as right to safety, right to be informed, right to choose, right to be heard, right to seek redressal, right to consumer education, and right to healthy environment. In the context of chargebacks and refunds, the Act empowers consumers to seek redressal for unfair trade practices and defective goods or services.   

Merchant Obligations

Merchants in India are bound by the provisions of the Consumer Protection Act, 2019 and Payment and Settlement Systems Act, 2007 to ensure fair business practices. They are obligated to provide accurate product information, clear return and refund policies, and timely resolution of customer disputes. Non-compliance with these laws can lead to penalties and reputational damage.

Note: It is crucial to consult with legal experts for specific advice related to chargebacks and refunds, as laws and regulations may vary and evolve over time.

Frequently Asked Questions (FAQs)

1. Is a chargeback the same as a refund?

A chargeback is a bank-initiated reversal of a credit card transaction, usually after the cardholder disputes the charge. A refund is a merchant-led repayment to the customer, usually when dissatisfied with the product or service.

2. What is an example of a chargeback?

When a customer claims they did not authorize a purchase on their credit card or did not receive the goods or services they paid for.

3. Can I refund after a chargeback?

A refund after a chargeback is possible but not recommended. This is because it can result in a double refund chargeback, where the customer receives both the chargeback and the refund. You will lose twice the amount of the original transaction.

4. Can merchants challenge or dispute a chargeback?

You can challenge or dispute a chargeback if you have evidence that the charge was valid and authorized or that you fulfilled your obligations to the customer. 

5. What are the potential costs associated with chargebacks for merchants?

Loss of revenue, chargeback fees, increased processing fees, higher risk of account termination, and damage to reputation and customer loyalty.

6. Are chargebacks and refunds applicable to both credit and debit card transactions?

Yes, but there are some differences. Credit card transactions are more prone to chargebacks, and customers have more rights and protections under the card network’s rules. Debit card transactions are similar to cash transactions. The funds are deducted directly from the customer’s bank account. Therefore, customers have less time and fewer options to dispute a debit card transaction.

7. In what scenarios would a seller typically offer a refund voluntarily?

A seller would typically offer a refund voluntarily in scenarios where the customer is unhappy with the product or service, the seller made a mistake, or the seller failed to deliver on their promise.

8. How does the timeline for processing a chargeback differ from that of a refund?

The timeline for processing a chargeback differs from a refund depending on the card network, the bank, and the merchant. Generally, a refund is faster and simpler than a chargeback, as it involves only the merchant and the customer. 

9. Why Did I Receive a Chargeback Instead of a Refund?

You might receive a chargeback instead of a refund if the customer disputes the transaction with their bank, rather than requesting a refund directly from you. Chargebacks are often initiated when the customer is unsatisfied with the resolution or finds it difficult to obtain a refund. They involve a more formal process and can impact the merchant’s account more significantly than a standard refund.