How are chargebacks different from returns?

chargeback-vs-returns

They may seem the same to customers but returns and credit card payment reversals, or chargebacks, have different implications for merchants. Read on to learn about those differences and what you can do to combat both problems.

What do returns mean for your business?

Returns are a straightforward business when compared with chargebacks. A return is when a customer is dissatisfied with a good or service and demands a refund in cash or in-store credit from the merchant. The reason for dissatisfaction can be manufacturer defect or something as capricious as receiving an unwanted gift. Merchants traditionally offer the possibility of returning unwanted merchandise as a way to encourage consumers to pull the trigger and buy.

That doesn’t mean that returns don’t cost businesses serious money. Total returns accounted for 11 percent of total sales or $428 billion in lost sales for U.S. retailers in 2020, according to a survey conducted by the National Retail Federation and Appriss Retail. For U.S. online retailers, returns averaged 18 percent of total sales or $102 billion. Returns clearly are a big concern, especially in eCommerce.

In the U.S., there is no federal regulation mandating that merchants accept returns. Any merchant is entitled to set their return policy. However, certain states’ laws require merchants to publicize their returns policy or be forced to accept a default returns policy within certain time limits. For example, in California under California Civil Code section 1723, if a store does not clearly display their limited or no return policy, the consumer may return the purchased item with proof of purchase for a full refund within 30 days.

Laws for returns vary by country, so it’s a good idea to check what rules apply to you. That said, the ability to control the returns process and the limit to its cost is what distinguishes it from a chargeback. With a return, you just lose the revenue generated by the sale and perhaps the cost of restocking (if you don’t charge the consumer for it).

What do chargebacks mean for your business?

Chargebacks are payment reversals requested by consumers for purchases made on their credit or debit card. They were created with the introduction of credit cards to encourage consumers to use their cards without fear of losing money to thieves and fraudsters.

Chargebacks cost U.S. merchants and banks over $31 billion in 2017, according to a study conducted by Javelin Strategy & Research. Despite their original reason for being, most chargebacks are illegitimate, meaning that the customer received and is using the goods or services. These illegitimate chargebacks were originally expected to cost eCommerce merchants an estimated $25 billion in 2020. The final data for 2020 isn’t in yet, but the actual numbers are anticipated to be significantly higher.

The short version of chargeback process is as follows: When a chargeback dispute is opened the issuer is credited for the amount of the purchase and the merchant’s account at their acquirer is debited. If the chargeback isn’t disputed or the merchant loses the dispute, the merchant loses the money. A chargeback fee, usually between $10 and $25, is also levied on the merchant by their payment processor. Should the issuer side with the merchant, the merchant will receive back the money from the original sale. Regardless of the outcome, the merchant must pay the chargeback fee. Things can get more complicated from there but that’s the basic scenario.

However, the costs and headache don’t necessarily stop there. If your ratio of chargebacks to total transactions exceeds a predefined limit (usually around 0.9 percent of transactions and 100 chargebacks per month), the credit card scheme will place you in a monitoring program and can even levy an additional fee per chargeback. Should your high chargeback ratio persist you risk being dropped as a client by your acquirer bank and even being blacklisted by the credit card scheme.

In short, returns may constitute a larger percentage of your sales, but chargebacks will hit your bottom-line hard and can even endanger your ability to accept credit card payments altogether.

How to minimize returns

There are several things you can do to minimize the amount of returns you receive.

● Use high quality depictions of the product: Write straightforward product descriptions and use clear, high-resolution images to advertise your products. This should reduce buyer’s remorse.

●  Leverage customer reviews: Ask your customers to fill out product reviews to help guide future potential customers.

● Invest in your customer service department: Keep channels of communication open and easy-to-use to ensure customers can easily access help when using your product or service. This will help ensure they don’t give up quickly and return the product, because they don’t know how it works or think it’s broken.

● Institute a generous return policy: Go beyond the typical 30 days for returns. It may be counterintuitive, but by reducing the sense of urgency customers have about making a return the less likely it is they will make a return. Part of this may be due to what is known as the endowment effect, where the longer a customer has a product the more of an attachment they will form with it.

How to protect your eCommerce business from chargebacks

Although chargebacks cannot be completely avoided, there are tactics you can employ to keep them to a minimum. Here are a few tips to help.

● Work with your customers: One of the best things you can do to minimize chargebacks is to keep your communication lines open so you can work with your customers to satisfy their needs. Give them peace of mind by providing different communication channels and respond to their requests quickly.

● Provide a clear descriptor:  When billing customers, make sure the descriptor includes your brand name and customer service phone number. The descriptor is what your customer sees next to the charge on their credit card statement. If you have and use a different legal name for billing, your customers may not recognize the charge and initiate a chargeback.

● Proof of delivery/purchase: Properly store all documents showing proof of delivery or records showing a sale made in person. This will be instrumental in the event of a chargeback case.

● Be clear about your refund policy: Confusion equals chargebacks. Clearly state how goods should be returned and how customers can request a refund, so they don’t have to call the bank.

● Institute a more generous returns policy: Lengthening the time and conditions under which a return can be will reduce customers resorting to chargebacks to get their money back.

● Fight chargebacks judiciously: The more you push back on chargeback fraud the less likely you are to experience it. Customers who are looking for a free ride will begin to go elsewhere. The key is knowing which chargebacks to fight. Outsourcing this work to a chargeback management service can help you do this without losing focus on your core business.

What we do at Justt

Justt takes care of the hassle involved in fighting chargebacks using advanced technology. Our automated tailormade chargeback mitigation solution builds the strongest case evidence in the market, while providing a hands-off experience for customers. As a result our overall success rate is an industry-leading 83 percent of all cases.