As any merchant in the online landscape will tell you, chargebacks are one of the biggest headaches of ecommerce.

But efficiently dealing with refunds is no walk in the park either, with 40% of merchants reporting seeing an increase or significant increase in refund abuse in 2021, according to Qualtrics.

Today, we take a deep dive into the differences and similarities between chargebacks and refunds, and examine how to reduce both at your business.

Why Merchants Should Care about the Difference Between Chargebacks and Refunds

A refund request is when a customer, be they a fraudster or not, asks for their money back from the merchant, rather than from their card-issuing bank. With a chargeback, the same individual would be placing that request with their bank instead.

This seemingly minuscule difference has a ripple effect, because it means that with refunds, there are no intermediaries, and the merchant has much more control of the process as well as insight into the claim and how it will be resolved.

For the customer, the result might be the same (though sometimes with a refund you might need to send an item back). But for the merchant?

For the merchant, a refund is always preferable.

What’s the Difference Between a Chargeback and a Refund?

The simplest way to think about the two is that a shopper turns to the merchant for a refund, but they turn to their bank for a chargeback.

Because of this, the chargeback process is much more convoluted and costly than a refund request, with many more parties involved in chargebacks, as well.

Chargeback and Refund Comparison Table

RefundChargebackParties involved• 2: customer, merchant• at least 4: customer, merchant, issuing bank, acquiring bank, payment gateway (plus BNPL, other intermediaries)Initiated by• merchant (after shopper request or not)• shopper, via bankResources required• customer support team
• time to discuss with customer• customer support team
• time to process the chargeback
• potentially, time to contest the chargeback Cost to merchant• lost sale
• in some cases, lost item
• processing fee on original transaction• lost sale
• lost item
• several processing & admin fees
• impact on chargeback ratio
• reputational damageResult for customer• cost of purchase recovered• cost of purchase recovered
• keep item(s) (if received)

Cost of Refunds vs Cost of Chargebacks

The simplest way to think about the differences between the cost of refunds and chargebacks is to remember that chargebacks always include the refund price but also involve processing costs, because more parties are involved.

To a customer, the two processes might seem almost identical. In fact, the chargeback workflow with their bank might even feel smoother than approaching a merchant as a customer and explaining why you should receive your money back.

It should be acknowledged that though chargebacks are in place to protect consumer rights, and rightly so, merchants are certainly at a disadvantage. This is because it is very difficult to do chargeback recovery, which entails showing ample proof that the products or goods were in the expected condition, that they were delivered to the shopper, that the merchant has taken all recommended steps to ensure the payment was legitimate, and so on.

So, in the case of refunds, a merchant can more easily challenge the customer’s claim if it is false (and thus a case of friendly fraud). If your Terms and Conditions are bulletproof, you might also choose to explain to the customer that they do not have a legitimate claim for a refund.  

Therefore, the cost of chargebacks is amplified by the fact they are less likely to be blocked by the merchant – be they fraudulent, fraud-related, or legitimate.

11 Reasons Why Refunds Are Better than Chargebacks for Merchants

There are several benefits to trying to encourage refunds instead of chargebacks:

1. Little or no fees: By dealing directly with the customer, even if the business needs to return the money, a merchant avoids paying the banks and payment processors’ admin and processing charges – including the dreaded chargeback penalty.
   
2. Keeps you on good terms with banks: Refunds have no impact on the merchant’s chargeback ratio. If the chargeback rate of a business is high, they will be forced by the bank and payment processors to pay higher admin and processing fees on all their transactions. Get it too high, and you can’t even trade with customers who use this type of card issuer. In simple terms, you won’t be able to process any Visa or Mastercard cards, for example.
   
3. Can save the sale: There will be instances where the customer who initially approached you for a refund is happy to receive a replacement product or a voucher instead of their money back. This means you can still save the sale or at least encourage them to return to your shop later on.
   
4. More checks and balances: As a merchant, you know your items better. When a customer claims they are not as expected, you can provide guidance and troubleshooting before considering a refund. You can even ask to see pictures or videos that demonstrate the issue, for added certainty.
   
5. Catch friendly fraud: Opportunistic fraud is easier to identify if you deal directly with the customer, as you can ask for details and proof before refunding. The onus of proof is on them, and they are dealing with you, rather than convincing a third party such as a bank.
   
6. Happier customers: By speaking to them directly, the merchant is able to – or at least can try to – ensure the customer is still happy and might be returning. Importantly, it becomes obvious that it is the shop that helped the customer and demonstrated goodwill, rather than the bank helping them.
   
7. Identify quality issues: For genuinely faulty items, the merchant can find out which of their stock isn’t working out for customers and choose to change suppliers, their delivery company or other partners. This is because with a refund request, the merchant can ask the customer for additional information about what went wrong.
   
8. Quality control: Both the quality of the items or services as well as that of the promises made by advertisements, marketing and other communications can be monitored and potentially ameliorated according to information sourced from refund requests. For example, a merchant could realize their listing on a marketplace is misleading and customers often misinterpret it.
   
9. Allows for supplier negotiations: The merchant can turn to their own supplier to resolve any quality or other issues, or can even potentially request a refund.
   
10. Quicker resolution: Refunds are much quicker to deal with than chargebacks. This also has a knock-on effect on customer satisfaction and on merchant resources and workload.
    
11. No reputational damage: Refunds tend to work to the benefit of shops, while chargebacks are more likely to cause reputational damage.

As a merchant, you have every reason to stress to your customers that they can come to you with any refund requests. Make your support team easy to reach too, monitoring your email closely and even employing a chatbot or live chat option.

What about Refund Fraud?

Refunds tend to also fall into various categories and of course there is such a thing as refund fraud. It includes, for example, return fraud and its subcategories.

However, as we’ve seen when looking at the consequences of chargebacks, refund fraud tends to be less impactful than chargeback fraud – though one would ideally want to eliminate all fraud, of course.

We should clarify that just like chargebacks, the frequency of refunds is also monitored by banks and payment processors, but the frequency at which they become a problem is much higher than chargebacks.

The intentions behind refund fraud range from innocent to malicious, with the most common examples sometimes referred to as friendly fraud:

• Innocent or accidental requests: The refund request is made by customers who did not mean to make the purchase, forgot they made it, do not recognize the payment, or had good reason to change their mind afterward.
• Opportunistic refund fraud: Just like chargebacks, refunds too can be weaponized by opportunistic and dissatisfied customers. A cardholder might lie about whether they found the item satisfactory, for example.
• Malicious friendly fraud: At first glance, this seems paradoxical. How can it be malicious and friendly at the same time? Well, some buyers have decided in advance that they’re going to request a refund. These bad customers have every intention of attempting to have their cake and eat it – for example by wardrobing, where you know when you are buying an item of clothing that you plan to only wear once and then return for a refund. There are also cases where the customer returns an empty box, or a box filled with useless items of similar weight, hoping nobody realizes on time.

Refund Fraud vs Chargeback Fraud

In terms of catching these two different types of fraud, a merchant is much better equipped to be able to realize they are taking place, compared to the data points that a card-issuing bank might have access to.

This is why your strategy should include these four main tenets:

• Encourage and enable customers to request refunds rather than chargebacks.
• Use authorization holds to prevent both.
• Employ fraud prevention software.
• Learn from past mistakes and dedicate time to analyze patterns in malicious behavior.

How to Encourage Customers to Request Refunds, not Chargebacks

One of the most cost-effective ways to mitigate against the headache of chargeback fraud is to gently encourage your customers to request refunds instead. So, how do you do this?

It starts with customer service. As we have seen, it is more intuitive and less time-consuming for a customer to ask for their money back from the shop than the bank, when they can find a way to do so.

In fact, one could even say it is more convenient. Indeed, customers are more likely to instinctively turn to their merchant rather than the bank if they can find a way to contact them. This is even the case online, perhaps because of bricks-and-mortar habits.

• Make your contact options easy to find on your website.
• Consider employing a chatbot to serve customers via social media.
• Monitor Twitter and other platforms for complaints against you, and be proactive.
• Depending on the size of your venture, you can also consider employing a dedicated billing support team available to reach via your website, for even easier contact.

In a similar vein, consider adapting your messaging to stress how happy you are to help with any issues at all. Finally, the Terms and Conditions section of your website should be up-to-date and easy to understand. If your shipping policies are on the complicated side, consider simplifying them, or providing a FAQ section to make them easier to grasp.

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