Chargeback vs. Refund: What’s the Difference?

Having dealt with chargebacks and refunds as an owner of e-commerce shops, I felt it was important to let you know the differences. Because the differences could determine whether your business will keep its payment processor.

I’ll explain the differences between chargebacks, refunds (and reversals) in various areas. From there, I’ll explain each scenario and how they work. Then I’ll explain how to prevent refunds and chargebacks potentially.

We have a lot to cover. Let’s dive in.

Key Takeaways

• Chargebacks are costly disputes, refunds are controlled, reversals prevent transactions.
• Prioritize refunds to save money, improve customer relationships, and protect your reputation.
• Clear refund policies and proactive customer service can prevent chargebacks.
• Reversals offer a quick fix for errors if initiated promptly.
• Businesses should understand the nuances between these processes to minimize losses.

Chargeback vs. Refund vs. Reversal

Here’s a table to illustrate the differences among chargebacks, refunds, and reversals:

The following sections will go more in-depth with all the areas in the table.

Let’s dive in.

1. Initiator

• Chargeback: Customer's Bank
• Refund: Business
• Reversal: Can be the customer, the business, the bank, or the card network.

With chargebacks, the customer's bank begins the formal chargeback process after the customer files a dispute. The bank reviews the dispute and decides whether to take money back from the business.

Refunds start with the customer complaining about an order (or a different situation happened). The business is responsible for issuing refunds. They review refund requests, check their policy, and decide whether to return the customer's money.

Reversals have more flexibility.

Customers might contact their bank to request a reversal if the wrong amount was charged or a duplicate transaction occurred. However, merchants can sometimes initiate reversals for technical errors or if a customer agrees to cancel a pending purchase.

Banks and card networks may reverse a transaction in cases of suspected fraud or technical issues.

Here’s an example.

Someone uses a customer's credit card information fraudulently to make a purchase at your business. The bank's fraud detection system might automatically reverse the transaction to protect the customer's account.

Additionally, suppose a technical glitch causes the same transaction to be processed twice. In that case, the card network might identify the duplicate and initiate a reversal to prevent the customer from being charged unfairly.

Summary: Chargebacks are customer-driven and resolved by banks. Businesses control refunds, while reversals can be initiated by various parties.

2. Control

• Chargeback: Customer's bank
• Refund: Business
• Reversal: Depends on who initiated the reversal

The customer's bank holds control in a chargeback. They decide whether the customer's dispute is valid and if the business should be forced to return funds.

However, the business controls the refund process. They may have a set refund policy and can choose whether to approve or deny refund requests as situations arise.

The controller of reversals depends on the initiator.

If initiated by the customer, their bank likely makes the final decision. Otherwise, if a business initiated it, they may have control, but their bank or payment processor processes the reversal.

And if a bank or card network initiates it, they control what happens.

Summary: Banks decide chargeback outcomes, businesses control the refund process. Reversal control depends on the situation and who initiates it.

3. Cost

• Chargeback: High cost, includes fees and lost product.
• Refund: Moderate cost, primarily the loss of the product.
• Reversal: Usually the lowest cost option.

Banks and payment platforms usually charge merchants $20–$100 per chargeback instance [1]. These fees occur regardless of whether the merchant wins the chargeback. If the situation escalates to arbitration, businesses could pay an additional $600. 

In addition to chargeback fees, businesses will lose the cost of the product, what you paid for the labor, shipping and marketing, and other related expenses.

Excessive chargebacks may also result in the loss of your payment processor.

Refunds are more forgiving. Merchants only lose the revenue and the fees related to having your product sent back. You’ll also lose out on payment processor fees (e.g., PayPal fees).

So long as you haven’t already shipped the product, the biggest loss from reversals comes from the loss of a sale. Possibly also the marketing and labor involved with promoting or picking said product.

Summary: Chargebacks are the most expensive due to fees and potential repercussions. Refunds are less costly, while reversals are generally the cheapest.

4. Customer Relationship

• Chargeback: Negative impact, can create distrust or frustration.
• Refund: Can be positive or neutral, depends on the experience.
• Reversal: Usually minimal impact if the issue is resolved quickly.

Chargebacks can breed resentment. Customers might feel like the business didn't handle their issue fairly, especially if the chargeback was valid.

Refunds have the potential to rebuild goodwill. If handled quickly, customers feel valued. However, slow or complicated refunds can cause negativity.

If a reversal fixes a technical error or resolves a misunderstanding promptly, the impact on the customer relationship is likely minimal. If the process is prolonged or confusing, it can cause frustration.

Summary: Chargebacks often harm customer relationships, while refunds offer opportunities for improvement. Reversals typically have the least impact on the customer relationship.

5. Level of Dispute

• Chargeback: Highest level, is a formal dispute process.
• Refund: Lesser level, may involve discussion but less formal.
• Reversal: Least formal, often a request.

Chargebacks involve the customer filing a formal dispute with their bank, following specific procedures and timelines. Businesses must defend themselves against the chargeback with evidence.

However…

Customers typically initiate refunds by contacting the business directly. The level of "dispute" depends on the business's policy and the reason for the refund. Ranging from requests to more detailed discussions.

A reversal might be a request to the bank or business in cases of a technical error, or due to the customer changing their mind.

Summary: Chargebacks involve a formal bank dispute, refunds are business-level discussions. Reversals are often the simplest to resolve.

6. Result for Customers

• Chargeback: Customer likely gets money back, but process is longer.
• Refund: Customer gets money back quickly & directly.
• Reversal: Customer gets money back quickly, or the charge is stopped.

During a chargeback, if the bank rules in favor of the customer, they'll get their money back. However, the process can take weeks or months.

Customers receive their money back directly from the business during refunds. This is the quickest and most predictable result.

When a reversal is successful, the customer has their money returned or a pending charge is canceled altogether. Depending on the situation, this can be faster than either chargebacks or refunds.

Summary: All three processes can result in the customer getting their money back. Refunds and reversals are usually faster and simpler for the customer than chargebacks.

7. Parties Involved

• Chargeback: Customer, customer's bank, business, business's bank
• Refund: Customer, business
• Reversal: Customer, business, bank (sometimes), card network (sometimes)

Chargebacks have the most complex chain. The customer disputes a charge with their bank, which then forces the business's bank to withdraw funds, reversing the transaction.

The transaction is between the customer and the business when dealing with refunds.

Reversals have some variability.

If a business needs to cancel a pending charge, they’ll get their bank involved. If there are errors or duplicate charges that need resolving, the customer’s bank will get involved.

And in scenarios involving fraud or system errors, card networks will potentially get involved. Otherwise, reversals will always involve businesses and customers.

Summary: Chargebacks involve multiple parties within the banking system. Refunds are primarily a customer-business interaction, while reversals can involve different combinations.

8. Resources Required

• Chargeback: High: time, evidence, potential fees
• Refund: Moderate: time, sometimes restocking or processing fees
• Reversal: Low: usually minimal time and effort

Businesses must invest time and resources defending chargebacks. This includes gathering evidence (receipts, communications, etc.), responding to the bank's inquiries within tight deadlines, and potentially paying fees.

Refunds take time to process and might have associated fees depending on the business's policies and processor. However, they're less resource-intensive.

Reversals require the least amount of time and effort. Customers may need to make a phone call to their bank, or businesses might contact their processor to cancel a pending charge.

Summary: Chargebacks require a lot of resources from businesses to fight them. Refunds take some effort, while reversals are generally the least demanding.

What Is a Chargeback?

• Timing: After transaction completion.
• Initiator: Customer.
• Reasons: Items not arriving, products differing from descriptions, unauthorized charges, or billing errors.

While a refund is initiated by the business, a chargeback is a forced reversal of funds by the customer's bank. Chargebacks typically occur when a customer disputes a transaction on their card statement, with reasons ranging from suspected fraud to items not arriving as described.

There are specific reasons and time limits for filing a chargeback. For instance, if they receive an item that isn’t as described in the product description.

Unlike refunds, chargebacks come with fees that range from $20–$100 per instance. These fees can vary between card providers and processors.

Businesses must be vigilant about chargebacks, as exceeding a 1% chargeback-to-transaction ratio can lead to fines or the loss of credit card processing privileges.

Summary: A chargeback is a dispute between a customer and a business. The customer's bank forces the business to return the customer's money.

Chargeback vs. Dispute

A dispute arises when a customer questions a charge. The reasons why they happen are identical to reasons chargebacks happen.

Disputes are the process that happens before chargebacks.

Chargebacks and disputes begin with a customer questioning a transaction on their credit card statement. They often stem from issues like unauthorized charges, products not received, or dissatisfaction with the product or service.

And here are the differences between chargebacks and disputes:

Initiation: Both situations involve the customer contacting their bank to question a charge.

Outcome:

• Dispute: A business can resolve a dispute in various ways (refund, replacement, etc.).
• Chargeback: Always results in the business losing the transaction amount plus fees.

Power:

• Dispute: The business has the chance to resolve the matter.
• Chargeback: The power lies mostly with the customer's bank.

Consequences: Disputes don't have direct fees for the business. However, unresolved disputes can escalate into chargebacks, which do carry financial consequences.

Resolution Time:

• Dispute: Businesses can sometimes resolve disputes quickly, but they can also take weeks depending on the complexity and the bank's process.
• Chargebacks: Have a longer, more formal resolution process that can drag on for months.

Summary: Think of a dispute as the initial stage, potentially leading to a chargeback if unresolved or deemed valid by the customer's bank.

What Are Double Refund Chargebacks?

A double refund chargeback happens when a customer receives a refund from the business and a chargeback from their bank for the same transaction. This results in the customer getting their money back twice.

Leaving the business out of the product cost and hit with a chargeback fee.

Here’s how double refund chargebacks happen:

• Customer Confusion/Impatience: A customer requests a refund, but it gets delayed. They get impatient and file a chargeback simultaneously.
• Accidental Double Requests: A customer might accidentally request a refund from the business and their bank.
• Fraudulent Intent: In some cases, customers may deliberately try to get their money back twice.

To prevent double refund chargebacks, ensure you issue refunds quickly and let customers know the typical refund processing time. These methods help reduce customer frustration and keep them out of the dark.

Also ensure you pair these techniques with typical chargeback prevention methods and tools.

Summary: A double refund chargeback is when a customer gets their money back twice for the same purchase. Businesses need clear refund policies and communication to prevent them.

What Is a Refund?

• Timing: After transaction completion.
• Initiator: Business.
• Reasons: Same as chargebacks.

A refund is a voluntary repayment made by the merchant to the customer. The merchant initiates this process based on their return policy. It involves the merchant returning the customer's money directly, without the involvement of other parties.

Here’s the refund process:

• Customer Initiates: The customer contacts the business to request a refund, explaining the reason.
• Evaluation: The business reviews the request based on their refund policy.
• Approval & Processing: If approved, they issue the refund, usually to the original payment method.
• Timing: Refund processing times vary between businesses and banks.

Are refunds the same as returns and cancellations?

No.

Returns involve the customer sending a physical product back to the business. A refund is often the outcome of a return. Meanwhile, a cancellation happens before a product is shipped or a service is provided. Afterward, a refund happens for the canceled order.

Refunds, returns, and cancellations don’t incur additional costs (aside from the lost sale and labor) for the merchant.

Summary: A refund is a customer getting their money back after a purchase. Businesses generally control the refund process, unlike chargebacks.

What Is a Reversal?

• Timing: Before transaction completion.
• Initiator: Merchant, customer, and the customer’s bank.
• Reasons: Same as chargebacks

A reversal is a way to cancel a credit card payment before the transaction is fully processed. It's like stopping a payment in mid-air, preventing the money from reaching the merchant.

Various parties can initiate reversals like the cardholder, merchant, acquiring bank, issuing bank, or card brand. For reasons such as charging the wrong amount, accidental double charges, misleading product descriptions, damaged goods, or customer change of mind. 

And reversals happen for the same reasons chargebacks do (damaged goods, etc.).

Summary: A reversal is a proactive cancellation of a pending payment. A chargeback is a forced return of money after the transaction is complete.

Why Should Businesses Prioritize Refunds?

When a customer is unhappy, focusing on providing a refund can prevent a situation from escalating into a chargeback.

Benefits of prioritizing refunds include:

• Direct cost savings: Chargeback fees and potential increases to processing fees make refunds the cheaper option.
• Improved customer relationships: Easy refunds foster goodwill, while chargebacks breed frustration.
• Reputation protection: Fewer chargebacks help maintain a positive standing with banks and payment processors.
• Opportunity for direct resolution: Refunds offer a chance to proactively address customer concerns and prevent escalation.

An efficient refund process is essential. This means responding quickly to refund requests and making the return of funds as seamless as possible for the customer. Great customer service is also vital for preventing problems.

How to Reduce Chargebacks & Refunds (Fraudulent & Not)

Here are different ways to reduce or prevent chargebacks and refunds:

• Fraud Detection Tools: Implement software to flag suspicious transactions like unusual locations or high-value first-time orders.
• Address Verification (AVS): Check if the billing address provided matches the cardholder's information on file.
• Require CVV: Collect the Card Verification Value (security code) for an extra layer of protection.
• Website Security: Regularly update software, use firewalls & secure hosting, and choose a payment processor that prioritizes data security.
• Clear Product Descriptions: Provide detailed specifications, multiple photos/videos, disclose any potential limitations or common issues, and highlight product features.
• Manage Shipping Expectations: Offer clear shipping timelines and provide customers with reliable tracking information.
• Responsive Customer Service: Address inquiries and issues promptly, and proactively offer solutions or refunds when appropriate.
• Easy-to-Find Policies: Include links in the website footer, add a summary on product pages, and provide full details in order confirmations.
• Chargeback Prevention Tools: Identifies and tackles disputes and potential causes for chargebacks before they manifest into something more (we offer a prevention tool).

I don’t want to go too in-depth with these methods. Because we did that in a separate guide. Check it out for more information.

Summary: Merchants can reduce chargebacks and refunds by focusing on fraud prevention, clear communication, and proactive customer service. Addressing issues directly lessens the likelihood of formal disputes or fraudulent claims.

FAQs for Chargebacks & Refunds

Read on to find frequently asked questions regarding chargebacks versus refunds.

Why Did I Get a Chargeback Instead of a Refund?

Customers might file a chargeback if they don't recognize a purchase. They may also use a chargeback if refunds are slow or unavailable.

Is It Illegal to Keep a Double Refund?

Yes, it is illegal to knowingly keep a double refund.

Wrapping Up

Chargebacks are forced by the customer's bank, refunds are controlled by the business, and reversals can be initiated by various parties. Understanding these differences allows businesses to streamline issue resolution. Protecting profits and preserving positive customer relationships.

Learn how the Chargeback app can prevent your refunds from escalating to chargebacks now.