Chargebacks versus Refunds
29 / 08 / 2024
Learn about the critical differences between chargebacks and refunds to protect your revenue and improve the overall customer experience in your business.
Businesses aim to provide multiple online payment options to their customers to streamline their shopping process. At times, these online payment options sometimes come with a few challenges. Two of them are chargebacks and refunds. While many people use them interchangeably, they are different. Knowing the difference between the two can help businesses deliver a better customer experience and reduce the chances of chargebacks and refunds.
Difference Between Chargebacks and Refunds
As mentioned earlier, both chargebacks and refunds result in the transfer of funds back to the customer. There can be a number of reasons why chargebacks or refunds happen. Some key differences between them are -
Chargebacks | Refunds |
Initiated by the customer via their bank. | Initiated by the merchant, the bank is not directly involved. |
Reversal of transaction. | The merchant transfers the money back to the buyer. |
It costs merchants the original transaction amount as well as chargeback fees and penalties (in some cases). | It costs the merchant the original transaction amount plus return shipping or restocking fees. |
Chargebacks are frequently the result of fraud, billing problems, or merchant disputes that aren't amenable to direct resolution. | Refunds are frequently issued in response to returns, exchanges, cancellations, or consumer displeasure. |
Process of Issuing
To initiate a chargeback, the cardholder first contacts the issuing bank and then files for a dispute. The bank then checks the claim, which can involve a lot of paperwork as the bank requires documentation and evidence from both the customer and the merchant. This process can be long and complex, and can require weeks or even months to complete at times.
Refunds benefit merchants as they can initiate and complete this entire process of transferring funds back to their customers without directly involving the banks. They can process refunds via their online portal or point-of-sale system. This results in an immediate return of funds to the customer's account, which is suitable for building a satisfactory customer experience.
Time
One thing for certain is that chargebacks do not favour merchants in terms of time. In most cases, issuing banks bypass the merchants when issuing chargebacks. However, in cases where they verify from the merchants, the response period is often short. That is why any delayed or inadequate response can significantly decrease the chances of a successful rebuttal.
On the other hand, refunds are quite simple and the merchants have a lot of control over them. Merchants can decide the refund amount and time for processing as per their policies. Once they are confident about the final refund amount, they can process it with ease.
Cost to Merchant
This is one of the main reasons why chargebacks are highly undesirable for merchants. They come with a significant loss for the merchants. Not only do they have to pay back the original transaction fees, but the issuing banks and card companies also levy fees for chargebacks. For example, a chargeback of INR 1000 can end up costing the merchant around INR 1400-1500 after fees and penalties.
On the other hand, refunds are somewhat simple as they mainly involve returning the original purchase amount. While some processing fees may be associated with the refund itself, these are generally lower than the penalties incurred with chargebacks.
Revenue Loss
One thing to understand is that both chargebacks and refunds result in a loss of sales for the merchant. Hence, both are undesirable from a revenue perspective. However, refunds generally cost merchants less than chargebacks.
Another critical aspect is that chargebacks can also cause a reputation loss for merchants as they might involve fraud. If a merchant's chargeback ratio increases, they may face penalties and scrutiny. Essentially both chargebacks and refunds result in transferring funds to customers and losing sales for merchants which is why they are undesirable for businesses. Worldline payment gateway has the best security measures that help merchants protect their customers’ transactions and avoid chargebacks, Check it out!
