Many of you have asked for clarifications on whether a chargeback is the same as a refund.
And if not, what is the distinction? Plus, how can an e-commerce merchant approach both contexts without creating a loophole for the business to start hemorrhaging cash?
As part of our efforts to help savvy e-commerce entrepreneurs make the best business decisions and 10x their revenue goals with ease, this article will help you understand the differentiation between chargebacks and refunds. And it has loads of best practices for dealing with both subjects.
However, before we take a deep dive into excavating those hacks, here are some numbers worth highlighting. Research by the U.S. Census Bureau shows that “e-commerce sales amounted to $792 billion in 2020, representing an equivalence of 14 percent of total retail sales.” In similar research, the National Retail Federation found that “consumers returned an estimated $428 billion in merchandise to retailers last year, which is approximately 10.6 percent of total U.S. retail sales in 2020. Of those returns, roughly 5.9 percent were fraudulent, equating to $25.3 billion.”
You see how crucial our subject for today is?
Now, let’s get on with answering your questions and sharing valuable hacks to help you close any financial cracks in your e-commerce business by making a difference between chargeback and refund.
As we all know, a refund is when a customer requests their money back from the merchant because they are unsatisfied with a transaction. Refunds typically involve the buyer and the seller. The buyer returns the merchandise and requests a refund, which could be in-store credit or raw cash.
Some of the reasons for returns include incorrect items sent by the seller, the purchased item arrived damaged or with manufacturer flaws, merchandise (like clothing) doesn't fit, the order did not come early, or buyer's remorse.
However, as the data above show, there are also several recorded cases of return fraud in the industry today. Some customers use refunds to steal from the seller by returning an item that does not qualify for a return or refund. In some cases, they return items they already used or purchased from another vendor and request a refund. And being that it’s your word against theirs, these actors usually get away with such return frauds.
Here are some numbers: Returns account for 40% of all online sales, which means 1 in 3 online purchases will be returned. 92% of shoppers would buy again if the return process were simple. And 60% of shoppers read the return policy before making a purchase.
Although chargebacks are quite problematic for any ecommerce merchant however it is highly advisable to devise a refund policy that eventually ease the dispute process for you in future.
Many merchants confuse chargeback claims with a refund. Even though both concepts are somewhat similar in principle, there's are some crucial distinctions -- particularly in the method of application.
Unlike a refund, the customer side steps the merchant in filing a chargeback. They request a payment reversal for a specific transaction through their bank or issuer. And the issuer or bank is obligated by Federal law to execute that payment reversal without the merchant’s consent. Plus that, each chargeback comes with a definite, non-negotiable fee.
So first, the buyer files a chargeback dispute. The credit card issuer will review the details of the dispute. In some instances, they might invite the merchant to send further information on the transaction. If they determine that the buyer’s claim appears accurate, they will grant the chargeback by withdrawing the funds from the merchant’s acquirer and back to the buyer.
They will notify the acquirer about the chargeback and create a chargeback reason code, which is their reason for reversing the payment. if you believe that customer dispute is illegitimate you can fight meritless chargebacks with additional evidence like proof of delivery and original purchase documents.
The merchant will then decide whether to accept the chargeback or fight to establish the transaction. If they choose to fight it, they'll have to provide a set of evidence that shows the chargeback is meritless.
Upon receiving the merchant's compelling evidence and rebuttal letter, the acquirer will submit the merchant's documentation to the issuer. The issuer will then review the merchant’s representment. If they are compelling enough to legitimize the transaction, the issuer will reverse the funds back to the merchant’s account.
However, if they ruled against the merchant, the chargeback stands, and the transaction fee is forever reversed to the customer’s account. It will also increase the chargeback ratio of your merchant account.
How to limit return fraud and chargebacks
If you think return frauds are a minor case of individual fraud, think again. Even large multinational dubious organizations use return frauds to get the best of unsuspecting merchants. But that’s not all. Your competitors can also use returns to try and take advantage of you. They make a purchase, give you a few days, and boom, they send back the order and request a refund, leaving you trapped with more inventory than you imagined.
To limit your exposure to refunds and chargebacks, below are helpful hacks you can incorporate right away without overhauling your entire process.
Start by creating a solid return policy
Establish a workable framework for order cancellation and returns. Ensure your policy is one that you can quickly implement without sacrificing customer relationships.
- Be specific about what you expect from customers and vice versa.
- Make your Time Limits clear and precise, considering industry variables.
- Establish metrics for acceptable return shipping, fees, exceptional circumstances such as location or currency, and any other exceptions to the standard policy.
- Don’t forget to get your customer’s buy-in on these before they check out.
An excellent return policy serves its purpose if the customer could access it.
Industry analysis shows that as much as two-thirds of online shoppers read a merchant’s return policy before placing their orders.
No matter how friendly and flexible your return policy is, it does not mean much if your customers cannot find it. Good spots to feature your policy includes the homepage footer (as it’s a popular spot on your website), your checkout process landing page, and inside the purchase confirmation email that you send to customers. You can also add a hard copy of your return policy to every package you ship.
Think of your return policy as an extension of your brand. Make it represent the essence of your company.
Use returns as an opportunity to provide excellent customer service
No one wants to deal with returns after a sale. But if you are flexible, if you treat each return as an opportunity to improve your relationship with the cardholder, you can turn returns into a win-win situation that opens more doors.
Here’s an idea, consider trading a returned order for some percentage of its value in-store credit. That will show the customer you are on their side.
Educate your staff on proven security protocols
We’ve shared extensive tips and hacks to help you limit your chargeback and fraud vulnerability across various platforms. The first step in making them work for you is to learn and observe those hacks. And then, you must ensure that everyone in the organization is moving on the same tempo with you. If you automated your chargeback mitigation processes, which we highly recommend for the tremendous benefits it provides, make sure you are getting the full benefits. We highlighted the pros and cons of chargeback automation in the article to help you make the most informed decision.
Get professional assistance to help you fight back
The recommendations we've shared thus far will only serve your business if the customer is genuine. If you are dealing with an online shoplifter that’s bent on stealing your money, then you might as well double down and beat them in their game. It won’t mean much even if you incorporate all the checkout and customer relationship best practices in the world. You need to consult the experts in that game.
Take return fraud, for example. One MO of fraudulent customers is wardrobing or Free Renting. They return stolen merchandise for a full refund. Another tactic is substituting cheaper merchandise for another one of higher value before attempting a return.
Hence, it’s wise to seek out experts such as Chargeflow, whose job is to use high-tech and well-trained fraud detection eyes to give you the upper hand against friendly fraud and chargebacks.
Suffix: Can a chargeback and refund happen at the same time?
The answer is yes.
When the customer contacts the merchant for a refund and then files a chargeback simultaneously, the merchant may authorize a refund while the chargeback is being processed.
That’s often the case if the merchant is unaware of the chargeback or if the consumer notifies their bank after the promised refund has not been fulfilled. Knowing that, some vendors choose to call the issuer before a refund to prevent the triple tragedy of making a refund and enduring the chargeback and its ancillary charges.
But if you are using Chargeflow’s automated dispute management framework, all those manual labor and guess work wouldn’t be necessary. You have access to extensive data and tools to make informed decisions at any time.
Can a merchant refuse a refund and offer a chargeback instead?
A merchant can refuse a refund but cannot offer a chargeback instead as they are separate processes. A refund is initiated by the seller, while a chargeback is initiated by the cardholder or issuing bank.
How long does it take to process a chargeback or refund?
The time it takes to process a chargeback or refund depends on several factors such as the issuing bank, the acquiring bank, the type of card used, and the reason for the chargeback or refund. On average, a chargeback can take anywhere from a few weeks to several months to resolve, while a refund can typically be processed within a few days to a week.
Are there any fees associated with chargebacks and refunds?
Yes, there may be fees associated with chargebacks and refunds. Chargeback fees are typically charged by the acquiring bank or card issuer and can range from $5 to $100 or more per chargeback. Refund fees may also be charged by some merchants or financial institutions.
Can a chargeback or refund be requested for a partially used or partially consumed service or product?
Yes, a chargeback or refund can be requested for a partially used or partially consumed service or product, but the specifics of the situation will determine whether it will be approved or not. The issuing bank or financial institution will consider the circumstances of the situation and make a decision based on their policies and regulations.