An Online Merchant’s Guide to Chargeback vs. Refund


As a merchant, you know how frustrating it can be when a customer sends back a product or service. You never like giving refunds though you know it’s a necessary part of running a business. In fact, you worry that your company might lose money in the long run due to refunds.

At times, you might find that your customers are trying to abuse the refund policies. You might decide not to give them a refund if they aren’t entitled to it. But then they’ll request a chargeback. This guide will look into chargeback vs refund and what you need to know about the two. You need to understand these terms to figure out what the consequences are for your business.

Let’s jump into it.

What’s a Chargeback?

If your customer doesn’t receive a requested refund, they’ll find a way to get a chargeback. They’ll reach out to their bank or credit card network to negotiate a refund on their behalf. The bank or network will insist that you give a refund. If you refuse, they might charge you penalty fees. You might have restrictions placed on your company. Your own banks and other vendors might stop doing business with you altogether.

Why Customers Get Chargebacks

So why does a customer get a chargeback? When a customer requests a chargeback, they’ll get asked by their bank why they are doing this. They’ll first have to prove that they requested a refund from the merchant.

They’ll have to prove that the merchant didn’t honor a refund. They’ll also have to show why a refund was warranted. They’ll then have to discuss why the merchant didn’t respect the refund request. It’s up to the bank to make the ultimate decision. It’s possible that they won’t offer a chargeback, but there’s a great chance that they will. Offering chargebacks helps them keep customer loyalty.

As a result, you want to try to offer refunds when they’re warranted. If they aren’t, then you want to make sure you’re willing to take the risk of a chargeback. You also have to know that some customers will try to forgo refund requests and get chargebacks. This is fraudulent and can be intentional or unintentional.

Reducing Chargebacks

You want to make sure to take regular steps to reduce chargebacks whenever possible. If you receive excessive chargebacks this can result in major revenue losses for the company. The first step is to have a clear refund policy. This will let your customers know how to get a refund if they wish.

It’s also ideal to write a Terms and Conditions statement that customers will have to agree to before making a purchase. This way, you have proof that your customer understood the terms before they bought their products. In these terms, you can state that the customer must request a refund first. You can state that you’ll fight the chargeback if this procedure isn’t followed. You want to make sure you speak to your business attorney on how to word this section. If you find that a customer tries to push for a chargeback through fraud, you can try to fight this chargeback. You can then ban this customer from using your store again.

Giving Refunds

As a merchant, you want to try to give a refund whenever a chargeback is a threat. If you don’t win your case, you’ll have to give a refund plus a penalty fee. Too many chargebacks will mean that your bank will stop working with you. Your credit card company will follow suit. You might also not be able to use payment processing services. Even if you win your case, any chargeback gets recorded and shared with credit card networks. This chargeback to refund ratio is something that credit card networks always keep an eye on.

The more chargebacks that get recorded, the higher your chances of losing faith from the networks

Refunds will save you money in the long run. You’ll also garner a great reputation as a trustworthy merchant. If a customer gets a refund for their purchase, this will give them a great impression of your brand. They might consider giving your company another chance in the future. If they have to resort to chargebacks, they’ll do what they can to discredit your company to others.

More Best Practices

Let’s look at some more best practices for you to follow to reduce both chargebacks and refunds.

The first step is to make sure that you have a standard process for packing and shipping your products. Many merchants have to dish out refunds simply because they didn’t take care of packing and shipping products. Pack your products in boxes that are a direct fit. You want to use safety materials such as styrofoam peanuts or bubble wrap to prevent damage. Make sure you seal the boxes well before shipping. Make sure you ship products as fast as possible. In the age of expedited shipping, a customer can cancel an order if it doesn’t arrive in the nick of time! If you sell services, always offer a free trial first. This way, you won’t get immediate refund requests from dissatisfied customers!

You want to also create a detailed FAQ page. Here you’ll answer questions about the products and services that you offer, along with your policies on how you deal with credit card transactions, for instance, if you put an authorization hold on purchases. If a customer sees this, they’ll feel that you are transparent, trustworthy, and care about the quality of what you sell. Set up a customer service department where customers can inquire as much as possible about what your brand sells. Train your customer service representatives to become experts about your products/services. This will ensure that customers will buy without even thinking about refunds!

Chargeback vs Refund: Avoid the Former, Aim for the Latter

Now that you know the differences between chargeback vs refund, you can take steps to avoid chargebacks altogether. While you want to also avoid refunds, it’s always best to give these whenever possible. Your main focus has to be on providing a great product or service. This will ensure that your customers won’t have cause to request refunds or chargebacks.

Please share this guide with your fellow business owners. You can find more great business tips on our website.


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