Most of us know what a refund is – when money paid is returned to a customer from a merchant as they return the bought product because of various reasons. Similarly, chargeback also happens to return money to a customer. However, chargeback is seldom heard, which is a good thing because it only happens on bad occasions. In short, a refund is done voluntarily while a chargeback is done by authority and a penalty will be imposed. Chargeback is only applicable to card transactions while refund can happen on most payment methods.

Settle Your Refund to Avoid Chargeback

If a customer complains about a purchase and asks for a refund, it is important for merchants to look into the issue promptly. Unless a merchant has a strong reason and proof to refuse the refund, it is advisable to settle it as soon as possible because customers can proceed to file for a chargeback.

Note that customers can also file for a chargeback when there’s a fraud. If a customer were charged without consent or their card info was stolen, they can call the credit or debit card bank and file for dispute.

Why Avoid Chargeback?

As mentioned above, chargeback happens on bad occasions – it’s a draining process unless you have solid proof on the case. On average, it takes 180 days for a case to settle, and a chargeback penalty will be charged to the merchant. If the customer insists to go for arbitrary, merchants can be charged up to 500 USD. But that’s not the worst.

Card schemes have imposed a monthly chargeback ratio of 1% for eCommerce merchants. Merchants who hit the 1% or more chargeback ratio monthly may face a penalty from the card scheme as well as risk losing their online card processing facility with the banks.

The merchant’s name will be listed in the scheme’s list and will face a tough time trying to get an online card processing facility from another acquirer as they check the same scheme database for negative finding.

1% ratio is calculated based on the number of chargebacks (each transaction), against the total transactions processed throughout the specific month.

Merchant processes a total of 1000 transactions in January, and receive a total of 10 transactions for chargebacks in the same month.
Thus, 10/1000 = 1%

It is important for merchants to keep a close view of their incoming chargeback records and take immediate and necessary action to avoid chargebacks from accumulating. This is also why it’s important for merchants to settle refunds as soon as possible so that unhappy customers will not file for a chargeback.

Difference between Chargeback & Refund

Seller refuses to refund
Cannot reach the seller

Why do they happen?Broken or Unsatisfactory
Product not as described
Not delivered
Consumer to bankWho needs to do it?Consumer to Merchant
Customer file a report to issuing bank and submit receipts and proof of dispute or fraudWhat is the procedure?Customer contacts merchant and provides reasons and receipts
The bank or schemeWho approve it?The merchant
Yes, once approved it is charged to the merchant. The fee may go up to 500 USD if the case goes to the arbitration stage.Are there additional fees?Yes, charged to the merchant but cost very low.
180 days on averageHow long it takes1 day – 1 week on average
May not be approved subject to documents, policy and proof of fraud or dispute.DisapprovalMay not be approved subject to the refund policy

How to Handle a Chargeback

  • Specify a clause for a refund whether it’s a “No Refund“, “a % of the transaction will be charged”, “the balance to be refunded is allowed due to whatever reason” or “a partial refund in case of last-minute cancellation” on the terms and conditions.
  • Always provide the terms & conditions and make sure customer read, understand and tick agree to terms & conditions during checkout.
  • Terms & condition needs to be clear and straight forward.
  • Always make refunds for credit/debit card payment through payment gateway or acquirer so that there’s a record of the refund. With eGHL, you can make a refund through the admin portal.
  • If a merchant does a manual refund on your own, there will be no record and the customer can still officially file for a chargeback.
  • In case the customer wins a chargeback while refund has been made, the issuing bank can reimburse the amount back to the merchant when there is a record.

Documents to Present in case of a Chargeback

  • Hotel business – Photocopy of the customer’s passport during check-in, customer sign off on invoice, or any hotel application form during check-in, email conversation or Whatsapp between merchant and customer as proof they did the booking online, etc
  • Physical products – Delivery tracking number, delivery address, delivery consignment where customer signed when receiving, picture of the receiver, etc
  • Digital products – Digital products are one of the highest risks. as the product/service is delivered immediately to the customer upon confirmation of payment such as game-points, online subscriptions, telco reloads, e-vouchers, etc. However, the merchant can provide as many details as possible like “customer account detail” or “IP address of the customer”. For such cases, a very strong risk/fraud control needs to be in place before the merchant goes live.