What is the difference between a chargeback and a refund – and how to avoid them

In the retail world, chargeback and refund are two terms often used interchangeably to describe situations in which dissatisfied customers want to reverse purchases and get their money back. 

As a merchant, you lose the sale either way — which is why these terms are so often confused. 

Although chargebacks and refunds share much in common, there are major differences between the two. As a retailer, it’s important that you understand what a chargeback vs. a refund means for you — and what steps you can take to reduce their frequency. 

The main difference between a chargeback and a refund is who issues it. In the case of a refund, the merchant gives the customer the money back directly after the return or exchange of a product or report of dissatisfaction with a service. For chargebacks, the consumer receives credit from his or her card issuer. This typically involves some type of dispute or fraudulent action related to the original purchase, and may come with additional fees for the merchant.

How do retail refunds work?

Most of us are familiar with refunds — i.e., returns that are initiated by the customer and agreed to by the merchant. 

There are any number of reasons why a customer might request a refund, including:

• Damaged goods
• Poor quality
• Wrong merchandise
• Late delivery 

As the merchant, it’s up to you to decide whether or not to reject the customer’s reason. If you agree, it’s simply a matter of crediting that user’s account or returning the money. 

How do retail chargebacks work?

Like refunds, chargebacks are also initiated by the customers. Instead of contacting you directly, customers go through their card-issuing bank to dispute the charges. The bank then credits the users’ accounts before coming back to you — the merchant. 

Just as with traditional refunds, there are any number of legitimate reasons for triggering a chargeback — including damaged, late, or poor-quality merchandise. Another common trigger is when customers don’t recognize certain charges on their credit card statements. 

For example, the name of your business might be Acme Store. However, the payment descriptor attached to your merchant account could be TAS, Ltd (i.e., The Acme Store, Limited). Any customers who failed to make the connection could end up disputing those particular charges. 

Worse still, they could pretend not to recognize the purchase. This happens all the time in what is commonly known as “friendly fraud.” 

In fact, 86 percent of all chargebacks are likely cases of “friendly fraud” – customers knowingly buy items with the deliberate intention of disputing these charges after the fact.¹ 

Unfortunately, consumer protection laws make this easy to do. To initiate a chargeback, customers only need to call their banks or click the “dispute” button associated with their online accounts.  This type of fraud is especially common online where eCommerce merchants process card-not-present (CNP) transactions from anonymous shoppers.

Also known as “cyber shoplifting,” chargeback fraud is far more costly than refunds. Not only do you lose the original purchase amount, but you also lose the product sold and any fees or penalties incurred. It’s also a loss of time. You must deal with weeks (if not months) of back-and-forth correspondence with the customer’s card-issuing bank, since the onus is on you to prove that the transaction was legitimate.

Though merchants don’t usually have a good track record with chargeback disputes, there is a possibility of winning; however, when you consider the amount of time invested, the best defense against chargebacks (and refunds) is to prevent them from happening in the first place using a two-pronged approach: 

• One that addresses legitimate returns
• One that addresses fraudulent cases

How to reduce honest chargebacks and refunds

Below are tips to help reduce the number of legitimate returns within your store: 

• Only sell high-quality products and services. The better your offerings, the fewer unhappy customers you’ll encounter. 
• Provide excellent and easily reachable customer service. Doing so improves your ability to spot potential complaints before they negatively impact your bottom line. 
• Ask your payment processor for a merchant descriptor that accurately reflects your brand. If your business is called “Acme Store,” this is what customers should see on their monthly statements. 
• Invest in a reliable delivery service to ensure shipped items arrive undamaged and on time. 

How to reduce fraudulent chargebacks and refunds

Below are several strategies to help reduce the amount of “friendly fraud” that enters your payment environment: 

• Disable guest checkout. Requiring users to log in can help make it easier to trace purchases back to them. 
• Send customers a bonus gift or discount after they’ve made a purchase. Any user who subsequently claims these freebies will have a harder time pretending the original purchase was accidental or unauthorized. 
• Require additional verification details during checkout. In addition to credit card numbers and expiration dates, you should also request the three-digit card verification values (CVVs) from the backs of their cards or 4-digit card identification number (CID) on fronts of cards like American Express. With an address verification system (AVS) in place, you can match the user’s billing address with what the card-issuing bank has on file. 
• Use fraud management filters that automatically flag purchases made with suspicious cards from unverified locations. 

One final fraud reduction tip

As long as you’re open for business, there will always be people trying to game the system. The tips listed above might help deter some criminals, but there’s no way to eliminate chargebacks and refunds completely. 

That said, there will also be honest people who are either unaware of or unwilling to trigger your store’s refund policy. Given how easy chargebacks are to initiate, you can’t really blame them. Make your refund policy as intuitive and straightforward as possible. The less friction, the better. 

Unhappy customers will get their money back no matter what. Therefore, it’s in your best interest to guide them toward your well-publicized and hassle-free refund policy instead of the much more expensive and time-consuming chargeback option. 

Interested in learning more?

If you are a merchant and are interested in learning about fraud protection for your business, contact our team of payments experts today.

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1 “Chargeback Stats,” Chargebacks911, 8 February 2019