Accounting Money

Refunds vs Chargebacks: What’s The Difference?

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When a customer is not happy with a purchase they’ve made, there are two main ways in which they can request their money back: they can ask for a refund or they can file a chargeback. As a business owner, it’s important to know the difference between the two and the impacts that they can each have. This post explains more about the differences.

What Is a Refund?

A refund is the most traditional way in which a customer can ask for their money back. It involves you directly giving back the money for the purchase – either in cash or through an electronic transfer. 

Most companies will have a refund policy stating certain conditions in which a refund can be given. While it’s important to have certain rules in place to avoid customers taking advantage of unnecessary refunds, you should generally try to keep the refund process simple – otherwise you could encourage customers to opt for a chargeback.

What Is a Chargeback?

A chargeback is when a customer asks their bank or a credit card provider to give them the money back for a purchase. The bank or credit card provider gives the customer their money and then charges the seller a ‘chargeback fee’ to cover this cost. 

Customers usually have up to 120 days after a purchase to file a chargeback. While customers are supposed to attempt to obtain a refund first before resorting to a chargeback, a growing number of customers are finding it more convenient to go straight to their bank or credit card provider.

Why Should You Encourage Refunds Over Chargebacks?

While refunds and chargebacks may seem like they essentially have the same effect, chargebacks are typically a lot more costly. The chargeback fee you receive is likely to be higher than what you’d pay were you to give a refund. On top of this, if you frequently receive chargeback fees, you can eventually be classed as a high-risk merchant, at which point you could face higher chargeback fees or fines. You may even be blacklisted by certain banks and credit card providers or have your merchant account closed, potentially preventing you from accepting electronic payments. 

Refunds are a matter between you and the customer and so don’t have these repercussions. While you still don’t want to be giving out refunds too often, they are a better option than chargebacks. You should therefore be careful about denying customers refunds in case it prompts them to file a chargeback. Some companies will even preemptively offer unhappy customers a refund to stop them going down the chargeback route. 

What Are Some Ways to Reduce Chargebacks?

As already mentioned, some customers will opt for a chargeback if asking for a refund is too difficult. You should make sure that refund policy information is easy to find on your website and that there is an easy way of contacting you to request a refund. If you have a physical store or office, there should be staff here that are trained and authorised to offer refunds if a customer requires one. By making the refund process simple, customers are less likely to resort to a chargeback.

Of course, some customers may still resort to chargebacks regardless. You also have to be careful of fraud – some customers will file a chargeback using false claims that a product was faulty or false claims that their card was stolen. Chargeback management services are worth signing up to in order to help you monitor chargebacks and contest any that you think may be unjustified. Chargebackhit is the chargeback management service with a unified source of data for monitoring chargebacks, and could be a choice worth considering.

Some industries such as travel, gambling, adult entertainment and online subscription services are more at risk of dealing with chargebacks. If your company operates within one of these industries, you should consider taking measures to prevent chargebacks. 

What About Refunds? Should You Be Trying to Reduce These Too?

Refunds are still not ideal. If you continuously have to refund customers, your business could start to suffer a loss. If refunds are due to poor service, they may be accompanied by bad reviews, which could damage your reputation. In other cases, if your refund policy is too relaxed, you could find that certain customers continuously take advantage of this. 

So how do you reduce refunds without increasing chargebacks? There are a few measures that you may want to take:

  • Firstly, always strive to provide good service. Train staff well, introduce quality controls and don’t lie about your product. Most customers who are satisfied with your product/service aren’t going to request a refund.
  • If someone orders a product in the wrong size, do not offer an automatic refund – instead ask them to return it and offer an exchange. If the product is unused, this allows you to resell it. It also prevents shady customers lying about receiving the wrong size in order to get a refund. 
  • When delivering products, always use a reliable shipping service. Make sure delivery of the product is tracked – having a customer sign for a product or taking a photograph of the product once delivered can prevent customers falsely claiming that they didn’t receive the product to get a refund.
  • As for services, be wary of offering free trials that automatically sign customers up afterwards. Similarly, do not try to catch out customers with hidden fees. If customers feel they are being unfairly billed for things they didn’t sign up to, they may demand a refund or opt for a chargeback.

Finally, make sure that your refund policy is fair but not too relaxed. Customers should have a valid reason to request a refund – returning an item of clothing after wearing it because they ‘no longer like it’ is not a valid excuse. You should also consider the time frame within which customers are allowed to request a refund. Many companies will offer a guarantee for a certain period of time, encouraging customers to seek out a refund if there is a problem within that time, but not allowing them to seek out a refund afterwards. Check out this guide at Business Companion on how to write a refund policy.

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