Refunds and chargebacks are mechanisms to return funds to dissatisfied customers. Consumers and retailers sometimes use the terms interchangeably, but there’s a big difference between them.
In this article, you’ll learn what that difference is, why chargebacks are becoming more of a problem and how you can reduce both chargebacks and refunds as much as possible.
What are chargebacks and refunds?
A chargeback happens when a consumer disputes a transaction and requests their bank or credit card provider to reverse a payment. Banks pay consumers and then automatically pull funds from a retailer’s account (usually plus a fee).
Chargebacks typically occur when consumers experience an issue and cannot agree on a suitable resolution with the retailer. They are seen as a last resort when all other ways of getting money back have been exhausted.
For example, a customer may initiate a chargeback if they receive damaged goods from a retailer that subsequently refuses to refund the purchase.
A refund occurs when a retailer returns payment to a customer. It can happen when a customer returns a product in accordance with the retailer’s returns policy or cancels their order before it’s shipped.
What are the differences between chargebacks and refunds?
Consumers and retailers need to understand the differences between chargebacks and refunds. There are several, including how the repayment is initiated, how long it takes and how the transaction is reversed.
1. Initiation
A retailer initiates a refund when a customer requests it. They send the money from their bank account to the customer’s bank or card.
The consumer initiates a chargeback through their bank or card issuer. The customer contacts their bank to dispute a charge, which triggers a formal investigation. The card provider or bank credits funds to the consumer and then takes funds from the retailer.
2. Cost and complexity
Refunds are simple to process and relatively inexpensive. They are typically processed within a few days and cost retailers only a card transaction fee.
Chargebacks are more expensive and complex because they involve third-party bank intervention. They can take weeks or months to resolve. They also incur additional fees for merchants, which can cost £100 or more.
3. Time to Resolve
Depending on the retailer's policy, customers typically see money from refunds after three to five working days. It rarely takes longer than two weeks to process refunds.
Chargebacks take much longer to process. Depending on the complexity of the dispute and the parties involved, they can take several weeks or months.
4. Reputation and Risk
Refunds are a normal part of the customer-retailer relationship. They are low-risk and rarely negatively impact a merchant’s reputation. In fact, processing refunds quickly can encourage customers to shop again.
Chargebacks pose a greater reputational risk due to their association with fraud and the complex resolution process. High chargeback rates can lead to increased scrutiny from banks and potential penalties.
Types of Chargebacks
There are three main types of chargebacks:
- Criminal fraud: This happens when criminals make a transaction using stolen credit card information. Consumers notice the fraudulent activity and contact their bank to get their money back.
- Friendly fraud: This happens when a legitimate cardholder disputes a valid charge, either intentionally or by mistake. Maybe they forgot about the purchase. Alternatively, they could be attempting to get a refund while still keeping the purchase.
- Merchant error: These chargebacks result from mistakes made by the merchant, such as shipping the wrong product or delivering a damaged item.
Is chargeback fraud a problem?
Chargeback fraud, also known as cyber shoplifting, is a growing problem:
- Up to 80% of all chargebacks are abusive, according to research by Chargeflow
- Chargebacks cost UK merchants more than £128 million each year, according to Chargebacks911
- Retailers lose 2.5x the cost of the transaction
Unfortunately, consumer protection laws make it very easy for consumers to initiate a chargeback. They only have to call their bank or click on the “dispute transaction” button in their banking app.
How to prevent chargebacks and refunds
While chargebacks are a consumer protection mechanism, they can be costly for merchants. Here are some strategies to prevent them:
Have a clear refund policy
A clear and easy-to-find refund policy reduces confusion and encourages customers to use the proper refund channels.
Write your refund policy in simple language, use headings to make it easy to read and include links to other sources, like your customer support contact details. Add a link to your refund policy in your website’s footer and on all product pages.
Provide exceptional customer service
Reduce your customers' likelihood of going to their bank to dispute charges through fantastic customer service. If you can resolve their refund issue quickly and effectively, they’ll have no reason to take matters further.
Offer multiple channels for support, like phone, email and live chat. Respond quickly and aim to resolve all refund requests within a week.
Maintain accurate records
Comprehensive and accurate customer and transaction records are essential for disputing invalid chargebacks and maintaining compliance.
Keep detailed records of transactions, including delivery confirmations and communication with customers. This helps in providing evidence when contesting chargebacks.
Ideally, your store should have systems that store sales and customer history records for returns and payments. That way, you can review records for suspicious activity. You can also implement digital identification systems for delivery and returns. This will ensure that the customer who receives the goods is a verified purchaser and weed out fraudsters.
Partner with reliable logistics providers
Minimise the risk of chargebacks and refunds due to shipping errors by working with a reliable and experienced logistic partner.
At Pro Carrier, for example, we provide a specialist eCommerce cross-border delivery service that uses multiple carriers to get products to customers as quickly and cost-effectively as possible.
We also have an industry-leading returns process that makes it easy for customers to initiate a return via an online portal. You’re able to process returns quicker, too, thanks to our dedicated team that checks the condition of goods as soon as we receive them.
Reduce chargebacks with Pro Carrier
Understanding the differences between chargebacks and refunds is essential for businesses to manage customer disputes effectively.
While refunds are generally simpler and less costly, chargebacks involve more complexity and risk. By implementing strategies to prevent chargebacks and maintaining clear communication with customers, businesses can reduce financial losses and maintain a positive reputation.
If you’re looking to improve your delivery and returns service, keep accurate customer records and deliver an exceptional customer experience, Pro Carrier can help. Our combination of software and services gives retailers everything they need to provide an exceptional delivery and returns experience — one that dramatically reduces refunds and chargeback requests.
Speak to an expert today to learn more.