Chargeback vs. Refund: What’s the Difference?

What’s the difference between chargebacks and refunds? Chargebacks are bank-initiated transaction reversals that withdraw funds deposited into your business’s bank account and return them to the cardholder. Refunds are merchant-led, voluntary repayments to the customer.

Did you catch that subtle difference? With refunds, you control the repayment of funds. But with chargebacks, you’re often omitted from the conversation entirely.

Consider this simple analogy.

You and your coworker have a disagreement, which could be resolved with a simple conversation. But instead of engaging with you directly, your coworker goes straight to your boss to air the grievance.

Rather than settling it amongst yourselves, your coworker has cut you out of the conversation. Further, you face disciplinary action from your supervisor due to the escalated nature of the situation.

Have you ever encountered someone like that in your professional life? If so, you probably understand the frustrating difference between a return and a chargeback.

In a perfect world, all your customers would happily patronize your business, receive their products without a hitch, and go their merry way as evangelists for your brand. But that doesn’t always happen.

What can you do when a customer experience doesn’t go as planned?

Chargebacks vs. Refunds: 9 Major Differences

Let’s take a closer look at some of the differences between chargebacks and refunds within nine distinct themes.

REFUNDCHARGEBACK
COMMUNICATIONYou and your customer work together to identify a solution that benefits you both.Your customer bypasses you and discusses the problem with the bank instead.
CLARITYYour customer tells you exactly what’s wrong so you can solve the underlying issue. You have to make adjustments based on assumptions that may or may not be accurate.
REVENUE LOSSYou are aware of the upcoming revenue loss and can plan for it.Funds are forcibly removed from your account without any warning.
MERCHANDISEThe customer may be willing to return the merchandise so you can try to sell it again. You can’t ask the customer to return the merchandise since you’ve been omitted from the conversation.
REPUTATIONRefund counts are monitored, but they are a relatively low indicator of risk. Chargebacks are meticulously scrutinized, and penalties are quickly issued if activity increases.
FEESYou probably won’t be charged a refund fee.Chargeback fees are common and expensive.
RESOLUTIONFrom beginning to end, refunds are usually completed within a week or less.If a case progresses through all five stages of the chargeback process, it can take months to reach a final verdict.
TIMERefunds are usually quick and easy to execute.Chargeback management is a time-consuming process.
EXPERTISEYou need very little skills or insights to issue a refund. You need extensive knowledge of complex regulations, processes, expectations, strategies, and more.

Are Chargebacks or Refunds Better?

While neither chargebacks nor refunds are ideal, refunds are usually the lesser of the two evils. Chargebacks are far more expensive, tedious, and confusing to navigate.

There are several benefits of solving customer complaints with refunds instead of dealing with chargebacks. These are just a few:

  • You may be able to keep the customer. This is important if you made a mistake and the customer’s complaint is legitimate.
  • You can identify issues sooner. If the customer files a chargeback, it could be 2-5 weeks before you know there is a problem. But if the customer works with you directly during the refund process, you’ll know right away. Learning about a problem early on means you can solve the underlying issue sooner and prevent similar complaints in the future.
  • You could save money. Refunds don’t usually have the same fees and penalties as chargebacks. And if the order hasn’t shipped yet, you can save fulfillment and merchandise costs.

Why Did I Get a Chargeback Instead of a Refund?

Why do customers initiate chargebacks instead of requesting refunds? Aren’t refunds the more traditional method of getting money back? What makes chargebacks seem more appealing?

According to our Consumer Confessional report, there are five main reasons why customers don’t contact the business before disputing a transaction.

  1. “I didn’t recognize the purchase on my statement so didn’t know who to contact.”
  2. “I couldn’t find a phone number or email address for the business.”
  3. “I was afraid the confrontation would turn into an argument. I wanted to avoid the drama.”
  4. “I didn’t have time.”
  5. “I tried to call, but the wait time was too long. I gave up.”

Another big influencer is malicious fraud. If a criminal made an unauthorized purchase at your business, there were probably additional fraudulent transactions made with other sellers. Rather than contact each merchant individually for a refund, the customer can solve all the issues with one call to the bank.

Plus, with today’s technology, the bank will probably automatically issue chargebacks before the customer even knows fraud has happened!

What is a Double Refund?

A double refund is what happens when a transaction is subject to both a chargeback and a refund. This one-two punch results in the bank withdrawing the transaction amount from your account twice.

Double refunds are commonly caused by timing issues.

When you issue refunds, it can take several days for credit to appear on your customers’ statements. If customers are unaware of this delay, they might assume you failed to address their issues. The next logical step would be to use the chargeback process because it seems to be the only way for them to get their money back.

In these situations, customers are credited twice — once with the chargeback and again with the refund.

How to Prevent Double Refunds

Both refunds and chargebacks cause you to lose money — but double refunds cause double the losses!

Prevention tips essentially boil down to clear communication and aligned expectations.

  • Make it clear in your refund workflow that it could take a few days for the credit to be applied to the account.
  • Send a refund confirmation email so customers know you’ve responded to their request.
  • Settle batches quickly so the credit will be applied as soon as possible.
  • Never issue a refund after receiving a chargeback.
  • Sign up for order validation (Order Insight and Consumer Clarity) and prevention alerts. If the customer attempts to initiate a chargeback, these tools can notify the bank that you’ve issued a refund and a chargeback isn’t necessary.

How to Respond to Double Refund Chargebacks

If you issued a refund before the chargeback was initiated, you can fight the chargeback. As long as you provide evidence that supports your actions — including a timestamp for the refund — you should win the case.

Reducing the Risk of Refunds and Chargebacks

As we think through ways to reduce the risk of refunds and chargebacks, a helpful exercise is to think through the core customer pain points. What sentiment motivated the customer to initiate a chargeback or refund? Then, address each accordingly.

Wondering where to start? Let Midigator® help. Our technology gathers chargeback data so you can analyze it and tease out problematic patterns. Then, you can address the root causes of customer concerns.

1. “The product arrived in a damaged condition.”

If you’re noticing a pattern of a particular product, distributor, or transit provider delivering sub-par products to customers, it may be time to audit your supply chain.

2. “The item arrived too late.”

This sentiment is especially prevalent during holiday order spikes. Make sure you outline your shipping timelines and set delivery expectations.

You could even take a page from Amazon and include an alert next to the Buy button that says “will (or will not) arrive by Christmas.”

3. “The item is defective or didn’t produce the expected results.”

This one is a bit of a tricky one. While it’s possible the item could be defective, another cause of this customer sentiment is a lack of product education and clarity.

One practical strategy to alleviate confusion is to audit both your product images and description.

As a general rule of copywriting, you should have the following elements on your product page (and repeated throughout the buying process):

  • A clear product title
  • A 2-3 sentence value proposition of how the product solves a customer pain point
  • A 2-3 paragraph detailed summary of what the product can (and cannot) deliver

Beyond that, it’s always wise to include an FAQs section based on real customers’ feedback. It could be as simple as, “Does this toy include batteries?” or “Does this pet training collar work on cats as well as dogs?”

As far as photos go, the more you can include, the better. You’ll at least want to have:

  • Images of the product from all angles (including a 360-degree view if possible)
  • Zoomed in shots of product details
  • Multiple photos of the product “in action”
  • Photos of the product next to other household items for scale

4. “I couldn’t find an email or phone number.”

Make sure your contact information is easy to find — for example, in the footer of every page on your site. A ‘contact us’ page is also a great idea. The goal is to make it easier to contact you than the bank.

You’ll also want to make sure your refund policy is easy to find. When you write your policy, use simple, easy-to-understand language (no jargon).

For example, Pipsticks takes an informal, warm approach in their refund policy. Here’s how it reads from their FAQs page:

“As you know, we’re big on HAPPY around here. Which is why we’ve got a Happiness Guarantee for all of our products. If you don’t like something you receive, send it back (no hard feelings!).”

Make sure to feature your policy before, during, and after the transaction workflow. Include a disclaimer on the purchase page, your FAQ page, and in a post-sale confirmation email.

5. “I missed the refund deadline.”

Most banks have a 120-day window for chargebacks. As a general rule, try to stretch your refund policy accordingly.

This principle is especially relevant for products with a low “speed to value.”

For example, clothing has a very fast speed to value. You order a shirt; you try it on. If it fits, you keep it. If it doesn’t fit as you thought, you send it back.

Consumer electronics, on the other hand, typically have a slow speed to value. If a customer purchases a new smartphone or laptop computer, it may take them weeks — perhaps even months — of daily use to discern the product’s actual value.

So ask yourself: does your refund policy encourage chargebacks by not allowing enough speed-to-value margin?

6. “I didn’t recognize the purchase on my statement.”

It’s not uncommon for customers to forget about a purchase or not recognize a charge on their statement. An unclear billing descriptor is usually to blame.

A billing descriptor is a 20-25 character alphanumeric explanation listed for every transaction on a bank statement.

Most processors will default to your legal business name as the descriptor. This can be problematic if you’ve branded yourself differently than your legal business name.

For example, if your flagship product is a piece of photo-editing software, your customers may get confused when they see your company name instead of the name of the software itself. Some processors allow you to use dynamic descriptors, giving you another opportunity for clarity in crafting your explanation.

Cover all your bases by informing the customer of how the charge will appear on their bank statement in your post-sale email.

7. “I shouldn’t have to pay return shipping!”

As a general rule, making the refund process as frictionless as possible is a great way to mitigate chargebacks. One way you can do that is to offer free return shipping.

Try reevaluating your supply chain and fulfillment expenses. See if there are any adjustments you can make to accommodate the additional cost.

Need Help Preventing Revenue Loss from Chargebacks and Refunds?

At Midigator, we believe organizations should focus on bringing their unique value to the market, not getting lost in the monotony of risk mitigation and fighting chargeback.

If you’re ready to simplify chargeback and refunds, we can help. Sign up for a demo today to learn more.

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