People sometimes use the word “chargeback” and “refund” interchangeably, saying one when they mean the other. To the customer, to the layman, to the outsider, there may not seem to be much difference between the two. In both instances, the buyer gets their money back, right? So when a customer is unhappy with their purchase, it doesn’t seem like there’s much difference, and it’s not unusual for a customer to simply choose whichever is easier. If they don’t know how to request a refund then they might just go for a chargeback, instead.
But, from a merchant’s perspective, the two could not be more different.
Obviously, a retailer would rather that all sales really were final. It’s not just that a refund means money out of your pocket, it’s also the simple fact that you want to make your customers happy. If they’re sending stuff back to you, then that means that, on some level, you may have failed them. Sometimes it’s not your fault, sometimes the post office crushed the box or they made a mistake when they placed their order. But at the end of the day, it still adds up to an unhappy customer, which is not the aim of any legitimate business.
However, a chargeback and a refund will affect a business in two very different ways. Namely, the former is bad for business, the latter is relatively harmless. So experienced business owners and managers have a tendency to dread chargebacks, and will usually do anything they can to prevent chargebacks from being filed in the first place.
So with introductions out of the way, what are the differences?
Well, here’s what you need to know:
Chargebacks and Refunds: What’s The Key Difference?
The key difference between a chargeback and a refund is essential that a refund is mutually agreed upon by the seller and the buyer.
The buyer registers their complaint or requests a refund, it could be because the goods were damaged in shipping, they didn’t match the customer’s explanation, or the seller might have a no questions asked policy. In any event, a refund is when a customer says “Can I have my money back?” and the seller says “Sure!” Every store may have a different policy on refunds, but this is what it generally comes down to: It’s a mutually agreed upon backpedal on the purchase.
A chargeback is what happens when the seller doesn’t really have any say in refunding the customer’s payment. Chargebacks generally go through the customer’s bank or credit card company or whoever it is backing the card or account that the customer used to make the purchase. Chargebacks don’t require the seller’s permission for the buyer to get their money back, and they may not involve a return of the sold goods. Chargebacks can take place for any number of reasons from fraud to damaged goods and so on.
The end result for the customer is usually the same. They get their money back. But the effects that play out for the seller are very different between chargebacks and refunds.
Why Do Merchants Hate Chargebacks?
Chargebacks have a number of adverse effects for the seller. Perhaps the most obvious is the simple fact that the merchant doesn’t have a say in it. When a customer asks for a chargeback, they’re not giving the merchant the opportunity to help and improve the buyer’s experience. Many merchants will gladly offer an exchange or a refund, even coupon codes and other freebies. A chargeback is, first and foremost, just a bad exchange between the seller and the buyer.
Business owners value their customers.
Well, smart business owners do, anyway. Whether it’s one of your biggest customers, someone who does all their shopping with you, or someone who just pops in to grab a birthday gift for a friend or something now and then, every customer is a part of the lifeblood of a business. No customers, no sales, no sales, no company. So for starters, it just plain kind of sucks when a customer doesn’t give you a chance to offer them a refund before they go to chargeback. We value our customers, no matter what industry we’re in, and we want to keep them. A refund is a chance to keep your customer, a chargeback might mean that you’ve lost a customer for good.
But beyond this, chargebacks have a number of more direct negative effects on the seller, as well. A chargeback just doesn’t look good on your record. It can go to the Better Business Bureau and affect your rating. Chargebacks cost you just as much as a refund but you don’t always get the product back when the customer didn’t want it. Too many chargebacks can have a seriously adverse effect on your business and wind up with your payment processor having to charge you more or end your agreement entirely.
“High risk” merchants often have to work with specialty payment processing companies. High risk refers directly to a high risk of chargebacks. Some markets are more susceptible to this than others. For instance, online gambling is a field that inspires a lot of “buyer’s remorse,” and it’s not unusual for customers to file for a chargeback after losing some money in a few hands of online poker. Other fields affected by this include adult entertainment and firearms. But, you can also wind up being a high-risk merchant just because of your chargebacks, despite not dealing in a high-risk market.
Why Do Customers File For Chargebacks?
Ideally, chargebacks should be a last resort, something you file only when the merchant is absolutely refusing to give you a fair refund or follow their own policies, or if their policies are unreasonable. But chargebacks are easy to file because of a number of consumer protection laws that are in place. A legitimate chargeback may be filed when a product does not match the description or is damaged. Chargebacks can also be filed because of fraud. If someone has had their card stolen, it only stands to reason that they wouldn’t want to pay for the thief’s purchases.
Chargebacks can also be a matter of “friendly fraud.” Friendly fraud refers to customers who buy in bad faith, and then ask for their money back, claiming that they don’t recognize the purchase. The challenge with friendly fraud is that you need to be on the lookout for it, but if you treat every customer like a criminal, they will not hesitate to take their business elsewhere.
More frequently than you might think, however, people file chargebacks just because asking for a refund is too difficult. Many merchants think they’re being clever by making it very hard to get a refund. They hide the contact form somewhere behind six or seven sub-menus, they take forever to get back to the buyer, they put unreasonable demands on the buyer in order to get the refund and so on. This does not work. For every customer that gives up on their refund, there will be a dozen that go for a chargeback, instead. All they need to do to get a chargeback is call their bank. If getting a refund is easier than calling the bank, they’ll take the refund. If it’s not, they’ll take the chargeback.
They’re not trying to be malicious. They probably don’t know how it affects your business, and if they did, they might go ahead and be patient with the refund. Customers like supporting their favorite businesses. Maybe they don’t really care how Wal-Mart is doing, financially speaking, but when it comes to small and medium-sized businesses or any company with which they have a long history, it feels good to know that you’re supporting someone whose product or service you appreciate.
But not everyone has a free afternoon to spend navigating your refund process. So one of the easiest ways to avoid chargebacks is to make it very easy to get a refund. Offer to pay for shipping if they have to mail something back to you, put the refund button right on the front page, advertise your no questions asked money back offer like all those podcast sponsors do. If your customers know exactly how to get their money back by cooperating with you, then they’ll be less tempted to go “over your head,” so to speak, by talking to their bank or credit card company about a chargeback.
I Got Hit With A Chargeback, Now What?
If you’ve been hit with a chargeback, there are a few steps that you’ll want to take. These won’t necessarily guarantee that your chargeback is overturned or that you will get fewer chargebacks in the future, but these steps will help, nonetheless.
- Talk To Your Payment Processing Service
Your payment processor can help you to figure out how to prevent chargebacks in the future. They may suggest that you ask for a shipping address or other information in order to prevent friendly fraud, for instance. They may be able to recommend a better courier service to you if your shipper keeps crushing the packages. They don’t like chargebacks anymore than you do, and though the chargeback decision is made by the person who supplied the card to the buyer, your payment processor can help you to figure out how to improve your sales pipeline on your end.
- Challenge Every Chargeback
Every chargeback. Call the creditor or bank or whoever it is that hit you with the chargeback and challenge it. Even if they don’t overturn their decision, simply letting the decision stand is an admission of fault on your part, which can hurt you in the long run. By challenging the chargeback, you at least have a record that you did not agree to it.
- Make Follow-Up Calls
The bank or credit card company really doesn’t care about your end. They’re not going to bend over backward to make sure that you’re treated fairly. So don’t wait for them to call you back, make a follow-up call and ask how your case is proceeding. You’ll want to keep as many records of every sale as you can, as well.
Essentially the difference between a refund and a chargeback comes down to this: They both involve money being returned to the customer. But with a refund, there is a mutual agreement between the seller and buyer, they both agree that the customer should get a refund. With a chargeback, the customer is going to their credit card company or their bank or whoever it is that provided their card, and they’re telling them to cancel a charge.
In both instances, you lose a sale, but in the former, you don’t have a black mark on your record, and you can work to repair your relationship with the customer. A chargeback hurts your reputation and is something you generally want to avoid at all costs.