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Chargebacks vs. Refunds

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Last editedOct 20212 min read

If you’re a customer, you probably won’t notice the difference between a chargeback and a refund. Both options mean that customers get their money back after being disappointed or unhappy with a merchant’s products or services. However, there are some key differences which businesses need to be aware of to avoid losing money.

This article will talk about the difference between a chargeback and a refund and how to get your refund or chargeback management back, starting with what is a refund and what is a chargeback?

What is a chargeback?

Although the terms ‘chargeback’ and ‘refund’ are often used interchangeably, they refer to completely different returns processes. Chargebacks are most commonly used when a customer is severely dissatisfied with a transaction or when they don’t recognise the payment within their bank statement.

Buyers can request a chargeback from their card-issuing bank which then decides if the request is legitimate or not. In most cases, the bank will return the money to the buyer immediately or, if a merchant can provide evidence that the transaction was legitimate, then the chargeback will be disputed or refused.

What is a refund?

If a customer is dissatisfied with a service or a product that a merchant has provided, then they have the right to request a refund on their transaction. To do this, a customer has to contact the merchant directly to request a refund which they’ll carry out according to their own returns policy.

In most cases, a seller will refund the transaction with no problems, however there can sometimes be disputes over the quality of a product, time limits for returns or whether a customer has in fact returned a product in exchange for the refund. This is why it’s important that a merchant sets out their returns policies clearly to customers to minimise confusion and disputes.

What’s the difference between a chargeback and a refund?

The main difference between chargebacks and refunds is who the customer gets in contact with. For chargebacks, buyers will get in touch with their card-issuing bank, whereas customers will get in touch with merchants directly to ask for a refund.

However, a key difference that merchants need to be aware of are the extra costs associated with chargebacks. Although in both cases businesses will lose the amount of the returned transaction, the banks that deal with chargebacks will charge merchants extra fees to cover the cost of handling the process.

There are also further costs associated with chargebacks, including:

  • Time: dealing with these processes can take up merchant’s time and human resources.

  • Limits: credit card networks set limits on chargebacks. If you exceed this, it can impact on your merchant status and make it difficult for you to apply for accounts, loans or credit cards.

  • Fraud: known as ‘friendly fraud’, some customers may pretend that they don’t recognise a transaction and put in a chargeback request in order to get their money back. This is why it’s important to keep evidence of all transactions somewhere secure and easily accessible.

Being aware of these costs and putting a chargeback management process in place can help you to minimise the damage of chargeback requests.

How to get your refund or chargeback management right

If refunds or chargebacks aren’t managed correctly then they can severely impact on cash flow, particularly in small businesses. Difficult or unclear processes can also lead customers to become even more frustrated with your team, making them even less likely to return to you in the future.

As well as setting out your returns policy clearly to customers and having a chargeback management process set out to help internal teams, having a trusted payment provider to support you can minimise the impact of refunds and chargebacks.

Alongside managing payments, optimising processes and saving time on admin, GoCardless can help you to keep an eye on transactions and deal with chargebacks and refunds effectively.

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