Chargeback vs. Refund: What’s the Difference?

An ordinary consumer usually doesn’t know the difference between a refund and a chargeback and can even use the two terms interchangeably. However, experienced merchants know that the difference between these two concepts is actually huge and one of them is definitely the lesser of two evils. So, firstly let’s discuss each term separately and only then compare them and see their main differences.

What is a refund?

A refund is a specific type of payment when the amount of money that was used to purchase goods/services is returned to the customer. It is most likely that the customer makes the request for a refund from the seller, however, in some cases, the merchant can initiate the refund too. Refunds can be either full or partial.

Refunds are usually carried out in this order:

1. Firstly, a customer buys a product/service.
2. Then the customer receives the product/service but is unsatisfied because of a specific reason.
3. A customer contacts the seller, requesting a refund.
4. The seller (merchant) voluntarily issues a refund.

To avoid any refund-related disagreements or miscommunications, we strongly recommend adding a return policy on your website.

What is a chargeback?

A chargeback is another specific payment type when the customer asks their card-issuing bank to return a specific payment. If the customer is for some reason unsatisfied with the purchase or doesn’t recognise a specific transaction, they have the right to request a chargeback from their card issuing bank.

When a customer decides to file a chargeback dispute, the problem is taken to the issuing bank instead of the merchant. The card issuing bank then has to decide if the chargeback was legitimate or not. Usually, the bank immediately returns the money to the customer and only then starts the investigation. If the merchant has evidence that the transaction was legitimate, goods and services were delivered, etc., it is possible to dispute the chargeback.

The most frequent cases when chargebacks occur:

• The customer tried contacting the seller to get a refund but didn’t succeed.
• The cardholder didn’t recognise a particular transaction.
• The ordered goods/services were of low quality or damaged.
• The customer did not receive the service/product they paid for.
• The customer unintentionally placed an order several times.
• The subscription was cancelled, but the recurring billing was not disabled.

What is “friendly fraud” and is it the same as a chargeback?

”Friendly fraud” is commonly referred to as a type of chargeback when a buyer pretends not to recognise a particular transaction and, therefore, initiates a dispute at his card issuing bank. Because of customer protection laws, filing a chargeback has become very easy to do. Usually, all you have to do to initiate a chargeback is to call your bank. Some people also call this phenomenon “cyber shoplifting”.

What are the differences between refunds and chargebacks?

Now both terms are clear, let´s see what their main differences are.

• Authority - Firstly, the main difference is the authority that deals with the issue. In case of a refund, everything is handled between the merchant and the customer. However, in the case of a chargeback, an additional third player (the customer’s card issuing bank) is involved.
• Fees - The next major difference is the fees. Of course, both scenarios result in a loss of revenue. However, issuing a refund doesn’t cost extra for the merchant, while chargebacks usually come with additional fees. These fees are requested by banks and card networks to cover the costs of the chargeback handling process.
• Resource - Handling chargebacks takes way more time than dealing with refunds. Refunds can be made with a single click of a button in a few seconds. On the other hand, chargebacks can take several months to resolve.
• Limits - Chargebacks have limits set by credit card networks (VISA Europe and MasterCard International).

So, it means that handling a chargeback requires way more resources: time, money and human resources.

Let's take a deeper look into these difference:

In case of a chargeback, you lose all three. You lose time because you need to cooperate and prepare necessary evidence if you want to dispute a chargeback. You lose money because the card-issuing bank instantly takes money from you to cover the disputed transaction, you also face additional chargeback fees and the customer has no motivation to return the product (so you are unable to resell it later). And of course, dealing with a chargeback requires human resources, because you or your employees will have to handle the chargeback.

As concerns refunds, you also lose all three, but on a much smaller scale. It takes very little time to issue a refund – it usually can be done with a click of a button. Also, you will face much less money loss, because no additional fees will be applied and you will get your product back (in most cases). The only thing you will need to cover is the administrative costs, such as restocking costs. And, of course, handling a refund needs far less human resources.

In the meantime, refunds are not controlled by the card networks. If you exceed the chargeback limit, your merchant status can change from low to high-risk, or, even worse, your account can be suspended or terminated.

These are the chargeback limits applied to Cardinity merchants:

VISA – 1% (100 chargebacks)

MasterCard – 1.5% (100 chargebacks)

Can a chargeback and a refund happen at the same time?

Unfortunately, yes, they can. It can happen in a situation when a customer contacts both the merchant and the issuing bank, and a merchant issues a refund even though the chargeback process has already started. Always try to avoid this kind of situation and if you’ve been informed about a new chargeback, remember there’s no use issuing a refund.

As you might have understood by now, it is always better to issue a refund instead of dealing with a chargeback. This way you will avoid unnecessary expenses, wasting time and other resources. Chargebacks can be a headache for the merchants, but Nomupay will always try to help you through the whole process. If you want to stay informed, you can also check out our blog post to understand more about what a chargeback is or read in more detail about the chargeback process from start to finish.