Do you know the difference between Chargebacks and Refunds?

Unlike refunds, chargebacks come with additional fees for the merchant and increase a merchant’s chargeback ratio. If a merchant’s chargeback ratio exceeds certain thresholds, often around 1%, it can result in serious consequences, including fines, higher fees, higher reserve requirements, or even the termination of a merchant’s account. A voluntary refund, however, is strictly a matter between the merchant and the customer

To the casual observer, the difference between a chargeback and a merchant-initiated refund might seem trivial. The customer gets their money back either way, so is one really worse than the other? Of course, any merchant who’s had to deal with chargebacks first-hand knows the answer to this.

When a customer has a legitimate problem with a purchase they’ve made, it’s always better to give them a refund rather than leave them with no alternative but to file a chargeback. In some cases, it can even be preferable to refund a customer who you’re not sure has a legitimate problem, just to avoid a likely chargeback.

According to the Consumer Returns in the Retail Industry report published by Appriss, product returns and refunds for services cost US business more than $350 billion annually. This mind-blowing number is affected primarily by the online retail industry — in comparison with brick-and-mortar stores, where the return rate is only 8.89%, at least 30% of all products ordered online are returned for different reasons.

The return policy is a statement stipulated by the merchant that he is willing to accept previously purchased items and refund the customer (fully or partially) when certain conditions are met. The exact return policy and conditions depend on each individual merchant, but generally, customers can ask for a refund in cases such as:

The purchased product arrived with damages or factory defects

The received item didn’t arrive as described on the website

The merchant shipped the wrong item

The purchase didn’t arrive on time, or it was no longer needed

In the case of purchasing clothes, many times a piece of clothing is returned because it didn’t fit the customer the way he/she expected (or was the wrong size).

Because online shopping (usually) requires a payment before the delivery of the actual product, it can cause inconvenience for a lot of customers — especially when the product they received didn’t match their expectations. To reduce the risk for customers and encourage online shopping, the retail industry decided to implement return policies to ensure that clients can get their money back if they weren’t satisfied with the purchase.

Therefore, requesting a refund is a voluntary act initiated by the customer within the time frame stipulated in the return policy (it depends on the merchant, but usually within 14–30 days).

Credit Card Chargeback Merchant Rights

Unfortunately, companies do not have many protections when it comes to fighting against chargebacks. Even if your store has a ‘no refund’ policy, the Fair Credit Billing Act allows consumers to file chargebacks. Despite that, it is advised that business owners clearly display their policies and make consumers aware of their sales rules. This may become relevant if a chargeback ever goes through an arbitration process, and generally helps with the above process of fighting against chargebacks.

By most accounts, banks tend to favour the cardholder over the business owner in most chargeback disputes. This is why it’s important for merchants to do everything in their power to have purchases and transactions well documented, and in strict accordance with the rules set forth by the card networks.

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