Chargeback Vs Refund- What’s the difference?

With the year-round festive season happening nowadays, e-commerce merchants are all set to enjoy the flurry of shopping galas. With discounts, offers, and cashback being the most popular sets of words, the terms of chargebacks and refunds also grab the spotlight.

For a customer, both these terms mean that their money comes back to them as they are dissatisfied with the purchase. But for a merchant, these two terms hold a deeper meaning and impact on their business.

Before we understand that difference, let’s understand what they mean in principle.

Refund:

When a customer is dissatisfied with a product or service, he/she has the right to request a refund. To do so, the customer has to get in touch with the merchant, who will validate and process the refund as per their return policy.

Typically, this refund mechanism works only with online sellers, as most physical stores do not permit cash refunds. In most cases, online sellers refund the transaction without any hassle, but sometimes there can be a dispute if the time limit for returns has closed or the product is returned in damaged condition. So, it is standard practice for many sellers to request the customer for photos of the products before initiating the refund protocol.

Chargeback:

In a chargeback, the card-issuing bank is the principal person in play. When the customer does not recognize the transaction on their bank or credit card statement, they can dispute the same with the card issuer. In a chargeback, the merchant is not directly involved, and it is the card issuer who defines the legitimacy of the claim. In this situation, the merchant has the right to dispute the chargeback by submitting evidence that confirms the transaction’s validity and that the product/service has been delivered.

Usually, there are some standard scenarios where a chargeback is raised by the customer.

• When the seller refuses to accept a refund claim
• The services/product is not of proper quality/quantity
• There has been an unintentional repetition of several orders
• The seller has failed to provide the described services/product to the customer.
• The customer is not able to identify the transaction
• The case of recurring billing even though the subscription was canceled

While both of these actions are customer-led, there is a monumental difference in how they are handled and perceived by the merchant and card-issuing bank.

Next, comes the question, what happens if there is a chargeback and refund for the same transaction?

This situation is called a Double Refund aka Friendly Fraud. This often happens when the customer initiates a chargeback request with their bank and refund request with the merchant.

Double refunds can happen in any of these scenarios

Scenario 1: The customer misunderstands that chargeback and refund are one and the same.

Scenario 2: As the timeline for chargeback is quite long, the customer might initiate a refund request with the merchant as well under the misconception that the chargeback is not being realized.

Scenario 3: Fraudsters who very well understand the difference between chargeback and refund, but want to achieve double payment by conning both merchant and bank into returning the money.

In all these scenarios, it is the merchant who takes the loss of refund and the hit of chargeback. However, if compelling evidence is provided within the timeline specified by the issuer, the merchant stands a better chance of winning the chargeback.

So, the final question stands: are chargebacks or refunds better for merchants?

From a merchant’s perspective, refunds are far better than chargebacks. In fact, it is the lesser of the two evils. Refunds help merchants identify their gaps, while potentially saving their relationship with the customer. Also, there are quite a few advantages to having to deal with refunds rather than chargebacks, such as:

• The merchant will be able to identify the issuer much faster in a refund than a chargeback as it takes at least 2–5 weeks for a chargeback notification
• Even if the chargeback is reversed, the merchant still gets a hit as it will impact the chargeback ratio calculation
• The cost of incurring a chargeback is much higher as it is associated with overhead costs such as fees, management costs in addition to the transaction costs.

How can merchants lower their chargeback instances?

Understanding chargeback and its nuances might prove to be a tricky assignment as it involves a lot of conversations between many parties. Most of the chargeback cases are accepted because the merchant fails to provide the documents on time. However, by deploying our Unified Dispute Management (UDM) system, acquirers can help their merchants tackle and defend themselves against “friendly fraud” and chargeback.

UDM offers automatic reminders and pre-defined responses, through which merchants can instantly respond to the cases with requisite compelling evidence and prove the transaction’s legitimacy within their SLA. Furthermore, UDM empowers Acquirers and Payment Service Providers to save time and cost spent on the resolution of a chargeback.

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