payment disputes, refund vs chargeback, Acrocharge

Refund vs. Chargeback: The Hidden Tension

June 3, 2021
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by Ronen Shnidman

To consumers and the inexperienced retail hand, chargebacks may seem to be more or less the same thing as refunds. Nothing could be further from the truth! Not only are the outcomes for the retailer different but there is an inherent trade-off in the amount of refunds vs. chargebacks a business experiences.

Reasons for payment disputes

There are plenty of reasons for payment disputes between merchants and consumers. Merchandise sold could have turned out to be defective. Deliveries may never show. Customers may decide that they don’t actually want the goods they bought and want to return them. Plus, there is also always the perennial credit card fraud when a customer’s account details are stolen and used to make purchases.

These issues are best resolved with a refund from the merchant to the customer. Indeed, customers are expected and encouraged to first contact merchants directly to claim a refund when issues arise with payment or product quality and delivery. A refund could save your relationship with an angry or disappointed customer.

If you have too many chargebacks you will lose the right to accept credit cards, which will kill your business. Providing a voluntary refund to the customer saves you chargeback fees and potentially getting into hot water with your payment service provider over your chargeback ratio regarding sales revenue you might have lost anyway. Not only will chargebacks cost you the sale and an extra fee, but often you will lose the goods as well. You could say that a generous refund policy is one of the best chargeback prevention strategies at your disposal. 

Comparing size of refunds vs. chargebacks

When comparing refunds vs. chargebacks, the former is much larger than the latter. There are no figures for the size of merchant refunds in 2020. However, retailers in the U.S. accepted a whopping $428 billion in product returns in 2020 alone. It stands to reason that the total amount of refunds in the U.S. is even higher since it would include cases where a product or service is not returned.  In contrast, friendly fraud (which comprises the majority of chargebacks) is estimated to have cost U.S. retailers over $50 billion in 2020. 

Chargebacks happen when the refund process either isn’t utilized or one of the sides doesn’t respect the rules. Most chargebacks, over 80 percent, are illegitimate. That means they are filed by cardholders who aren’t entitled to their money back. In fact, a study from 2014 found that 81 percent of cardholders initiate chargebacks simply out of convenience. However, fighting these chargebacks ties up significant merchant resources and success is not guaranteed.

Refunds and chargebacks are two separate processes since the former is managed by the merchant while the latter is managed by the cardholder’s issuing bank. This means it's possible to have both a refund and a chargeback issues for the same transaction. Miscoordination between the issuer and the merchant can be quite costly in this respect. At the very least, if you have already issued a refund for a transaction that drew a chargeback, you should submit evidence to that effect to the issuer to fight the chargeback.

Justt mitigates chargebacks

Because you can’t fight off all chargebacks with a generous refund policy, you will need to invest in chargeback mitigation either in-house or externally. Justt is a company that can take the challenge of chargebacks off your hands so that you can focus on your core business. The Justt solution is tailored to your specific needs as a merchant to achieve the highest success rates in the industry. Combined with our performance guarantee, our success-based fee means that you can use our service risk-free. It can only help your bottom-line. 

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