Gravity Payments

Chargebacks vs Refunds: What’s the Difference?

Learn about the differences between chargebacks and refunds, and how to prevent them.

 Reading Time: 4 minutes

Dealing with chargebacks and refunds is probably not the way you want to spend your time.

Below, you’ll learn:

  • How chargebacks and refunds work
  • Differences between the two types of requests
  • How to prevent chargebacks and refunds

So, a few minutes of your time can potentially result in hours saved and thousands of dollars saved for your business.

Sounds like a good return on investment, right?

Let’s get started.

How Does a Chargeback Work?

A chargeback is a reversed payment that occurs after a cardholder disputes a credit card transaction with their card-issuing bank.

With chargebacks, there’s a lot that goes on behind the scenes, but here’s what’s important:

The merchant’s account is temporarily debited and the customer’s account is temporarily credited… while the card-issuing bank reviews the evidence.

If the customer wins, the temporary debits and credits are made permanent. If the merchant wins, the temporary debits and credits are reversed.

So, what causes chargebacks?

Criminal fraud, friendly fraud, and merchant error are three sources of fraud:

  • Criminal fraud: identity theft, account takeover, and domain squatting are a few examples.
  • Friendly fraud: not wanting to request a refund, being disappointed with the product or service, and not recognizing the charge on the statement are three sources of friendly fraud.
  • Merchant error: the product or services don’t meet advertised specifications.

And how do you prevent chargebacks?

Here’s how to prevent criminal fraud, friendly fraud, and merchant error:

  • Criminal fraud: use a secure payment processing solution, such as Gravity Payments.
  • Friendly fraud: ensuring customers have a positive experience with your product or service helps to prevent friendly fraud. Creating educational content and improving your customer service are two ways to do this.
  • Merchant error: clearly define your product or service, so customers know what they can expect – and not expect.

Note: pay attention to your chargeback ratio. if you have too many chargebacks, you risk fines, an increase in processing costs, and the potential loss of card processing rights.

How Does a Refund Work?

A refund is a return that the customer initiates and the merchant agrees to.

It is a simple process: you just credit the customer.

So, we’re going to jump to what causes refunds and how to prevent them.

Here are a few reasons why customers request refunds:

  • Poor fit: this is common for e-commerce stores selling clothing and shoes.
  • Wrong product: if you send somebody the wrong product, they are likely to request a refund.
  • Late delivery: this might be a major issue if you’re selling time-sensitive items, such as flowers or Halloween costumes. 
  • Damaged products: e-commerce businesses need to carefully pack their items for shipment.
  • Buyer’s remorse: if you sell a discretionary item, buyer’s remorse might be the (real) reason behind a lot of returns.

You are unlikely to eliminate every return, but you can significantly reduce the number of instances. To start, you can solve three of the above issues – wrong product, late delivery, and damaged products – by double checking shipments, setting the right expectations for timing of the delivery, and carefully packing items.

Regarding poor fit, you should provide customers an accurate way to estimate their size – if you don’t already.

While it isn’t easy to prevent buyer’s remorse, avoiding pushy sales tactics might help.

What is a Double Refund Chargeback?

A double refund chargeback happens when a customer requests a refund and files a chargeback, causing the merchant to lose double the cost of the transaction plus fees.

Here’s a couple of scenarios: 

  1. The customer initiates a refund, but it isn’t immediately processed, so they initiate a chargeback. 
  2. The customer initiates a chargeback, but doesn’t see the temporary credit, so they initiate a refund.

This sounds like a nightmare for small businesses, but the good news is that double refund chargebacks are uncommon for many business owners.

First of all, major card networks show refunds as pending credits, so the customer knows the money is on the way.

You can further reduce the number of instances of double refund chargebacks by asking customers who ask for a refund if they have initiated a chargeback. In addition, set the right expectations on the timing of the return.

What’s the Difference Between a Chargeback and Refund?

Let’s look at the differences between a chargeback and refund:

Chargeback Refund
Initiated by Customer Customer
Cost Cost of transaction + $20 to $100 in fees* Cost of transaction
Process Tedious Easy
Causes Criminal fraud, friendly fraud, and merchant error Poor fit, wrong product, late delivery, damaged products, buyer’s remorse
Prevention Get secure payment processing solution, create positive experiences for customers, and clearly define product or service Double check shipments, set the right expectations, and carefully pack items

*Source: Chargeback Gurus

The Bottom Line

Obviously, you want to minimize chargebacks and refunds. 

But you might not be able to completely eliminate them. And if/when a customer is unsatisfied, you want them to request a refund – not file a chargeback – based on the above comparison.

So, you should have a clear, well-advertised, easy-to-use refund policy.

You may still have to deal with a chargeback here and there, though. That’s why it’s important to have a processor that allows you to electronically monitor chargeback notices. 

Gravity Payments, for example, provides an electronic Dispute Manager portal, enabling clients to review and respond to chargebacks – before receiving a notice in the mail.

Contact us at (866) 701-4700 if you want to learn more about how Gravity Payments can help you protect your small business.

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