These two terms are often misinterpreted and used interchangeably by both customers and retailers. Charge and refund refer to a situation in which a customer is dissatisfied with a product or a service and wishes to have their money returned. Both of these terms involve you losing money as a seller, which is why they are mixed so often. However, when it comes to refund vs. chargeback, retailers ought to know the many differences between the two.
Refund vs. Chargeback: Which is better?
To the retailer, both of these options are undesirable. However, which of the two should you opt for if you can’t avoid it? Refunds are generally a much safer option for you and your business, and you are more likely to keep your customer. Furthermore, refunds are between you and your customer, allowing you to solve the dispute with the customer directly and without a medium. There are many ways you can make a compromise that will help make the customer happy and not request a refund. However, with a chargeback, this becomes much more difficult. Let’s discuss this subject in a bit more detail.
Differences between refund vs. chargeback
Simply put, a chargeback is a transaction reversal initiated by the customer’s bank. It withdraws the funds deposited into your business’ bank account and returns them to the customer’s account. On the other hand, a refund is much more direct and is done with the retailer without the bank’s inclusion. The retailer simply gives you your money back for the purchase you have made.
What does this mean for the customer?
For the customer, these two options are the same as they get their money back both ways. However, there is a subtle but significant difference between the two for the retailer. When it comes to chargebacks, you are entirely excluded from the transaction. The customer does not have to contact you at all to get a chargeback.
With refunds, the control of the fund repayment is yours. You can discuss the issue with your customer and maybe even dissuade them from requesting a refund. If the product is faulty, you can offer them a replacement for the product instead of giving them their money back. Retailers often also offer a compromise to make the customer satisfied and keep their money, a win-win situation for both.
The issue of returning the purchased product
Another significant difference between the two is that with a refund, the customer has to return the product. Because refunds are done in person, the customer has to bring the product they are dissatisfied with as proof of a valid refund request.
However, the customer doesn’t have to return the product regarding chargebacks. This is another reason why, as a merchant, you should always opt for a refund whenever you can.
Ultimately, having no refunds nor chargebacks requested by your customers is what every business owner should essentially strive for. Consider why your customer would want to cancel financial products or services and see how you can improve your business.
The negative effects of chargebacks on the retailer
Chargebacks come with additional fees for the business owner, which is why most of them prefer refunds. Additionally, each chargeback adds to the retailer’s chargeback ratio, which can have consequences on the business if it exceeds a certain threshold. With refunds, there are no such negative effects. Mainly because the customer and retailer come to an agreement.
When a chargeback transaction is made, the retailer is charged a chargeback fee as well. Depending on the payment processor, they can range from $20 to $100. However, these fees can increase if the chargeback ratio reaches around 1%. You can even become a high-risk merchant if your chargeback ratio exceeds a certain threshold. This will affect how easily you can accept payments in the future.
On top of that, the retailer can also receive fines or even the termination of their account. This is why, when it comes to refund vs. chargeback, the financial experts at triple7movers.com advise the business owner always opt for a refund. It is better to lose money on a refund and avoid the consequences of chargebacks.
It is sometimes possible to pause a dispute on a pending chargeback sent by your customer. With the use of chargeback prevention alerts, you can receive notifications when a customer requests a chargeback. This will give you a chance to contact your customer directly and discuss the issue. Sometimes, it is also possible to set up an automatic refund when the customer issues a chargeback. These tools are excellent for helping keep your chargeback ratio low.
Why do customers ask for chargebacks instead of refunds?
Although refunds are a more ‘traditional’ means of getting your money back as a customer, people request chargebacks for several reasons. For example, sometimes the customer sees a purchase on their bank statement which they don’t recognize. Fraudulent transactions can happen, in which case multiple purchases from different sellers can happen without you knowing. Not knowing how to get further information about the purchase or who to contact, they request a chargeback directly from the bank on all those purchases.
Post-buyer’s remorse is another reason for chargebacks. Many students who work part-time jobs often realize the money they spent on some purchase could’ve been used for something better. A student’s life is not easy, after all.
Sometimes, the customer might request a chargeback under the assumption of fraud for something they don’t remember they purchased. In such a case, the bank is on the customer’s side, and they will have it approved. This is quite unfortunate for the retailer whose service or product the customer might not have had issues with in the first place.
Of course, there is always the worry that the retailer might start an argument about the refund. In order to avoid potential drama, the customer requests a chargeback directly.
What is a double refund, and how to avoid it
A double refund can occur when a transaction is processed as both a chargeback and a refund. The result is you lose double the money for the same product or service. Poor timing often contributes to this issue. When your customer issues a refund which you give, it will take several days for it to reach their account. Customers are sometimes unaware of this delay. Thinking that they have still been charged for a canceled product, they request a chargeback as well, leading to them receiving both.
The best way to prevent double refunds is through communication. Let your customers know that processing the refund will take a few days. If your customer has requested a refund via e-mail, make sure to send them a confirmation mail about the acceptance of their refund. If you give your customer a refund before they request a chargeback, you can prevent a double refund. One of the ways to do so is by providing a timestamp of the refund. This serves as proof that you issued it before the chargeback request.
Final thoughts
When it comes to refund vs. chargeback, a refund is always the better option for the retailer. Chargebacks bring many drawbacks to business owners. So you take steps to avoid them as much as possible. To do this, communication with your customer is vital. Discuss the dispute with them to try and give them a refund. Also, don’t forget to mention the time delay that refunds have.