A chargeback is often confused with a refund, but they are actually two different processes. While both allow a customer to get their money back for a purchase, there are some key differences between chargebacks and refunds.
What is a Chargeback?
A chargeback is a dispute filed with a credit card company or bank to reverse a charge and refund money to the cardholder’s account. Chargebacks allow customers to dispute fraudulent, unauthorized, or incorrect charges on their credit card statement.
Common reasons for chargebacks include:
- Not receiving goods or services as described
- Being double charged for an order
- Receiving defective or damaged goods
- Being billed after canceling a subscription or membership
- Fraudulent transactions made without the cardholder’s consent
When a chargeback is filed, the funds in dispute are removed from the merchant’s account until the dispute is resolved. If the chargeback case is decided in the customer’s favor, the funds are returned to their account permanently. The process provides purchasers with a layer of protection against problematic transactions.
What is a Refund?
A refund is when a customer voluntarily returns an item or cancels a service and receives their money back from the merchant. Refunds can be initiated by the customer or offered by the seller if there is an issue with the order.
Common reasons for refunds include:
- The customer changed their mind about a purchase
- The item was damaged, defective, or not as described
- The service did not meet expectations
- The seller shipped the wrong item
- The customer no longer needs the product or service
Refunds are a cooperative process where the merchant agrees to give the money back, usually subject to return policies. Customers must proactively request a refund from the seller.
Key Differences Between Chargebacks and Refunds
While both chargebacks and refunds result in money returning to the purchaser, there are some important distinctions:
| Chargeback | Refund |
|---|---|
| Initiated by the customer’s bank or credit card company | Initiated by the customer directly with the merchant |
| A forced reversal of funds, without merchant approval | A cooperative process requiring merchant agreement |
| Starts a dispute resolution process | Amicable return process |
| Can occur months after the original transaction | Normally occurs shortly after the transaction |
| May incur fees for the merchant | Standard return policy applies |
The main distinction is that chargebacks are unilaterally initiated by the customer’s bank or credit card company, while refunds require the merchant’s consent and participation. Chargebacks also involve a formal dispute process.
When to Choose a Chargeback vs Refund
In general, a refund should be the first course of action if the customer is unsatisfied with a purchase. Refunds allow the merchant to rectify the situation directly with the customer. However, if the merchant refuses to issue a refund for an eligible reason, a chargeback may be the only recourse.
Common situations where a chargeback is appropriate after a refund is denied include:
- The customer never received the goods or services paid for
- The merchant went out of business and is unreachable
- The seller refuses to accept a return of defective or damaged goods
- The company will not refund an unauthorized or fraudulent transaction
- The merchant does not respond to refund requests
Chargebacks should be a last resort when working directly with the seller fails. But they provide purchasers with a vital consumer protection when issues arise with online or credit card transactions.
The Chargeback Process
If a refund request is denied or ignored, here are the basic steps to follow for a chargeback:
- Contact bank or credit card company: The cardholder alerts their issuing bank or credit card company that they want to dispute a charge. This is usually done online or over the phone.
- Provide details: Information needed includes the transaction date, amount, and merchant details. The customer will also explain the reason for the dispute.
- Bank investigates: The bank reviews the claim to determine validity. They may request documentation from the purchaser.
- Funds frozen: If approved, the chargeback amount is temporarily credited to the customer while disputed.
- Merchant response: The merchant is informed of the chargeback and given a time frame to challenge it if desired.
- Case closed: If the merchant cannot adequately disprove the chargeback, the decision becomes permanent in favor of the customer.
Each credit card network like Visa and Mastercard have their own specific processes, but involve investigating claims and arbitrating disputes.
Chargeback Time Limits
Chargebacks must be initiated within a limited time period after the original purchase. The time limit varies depending on the reason for dispute, but commonly ranges between 60-120 days. For example:
- 120 days for issues related to merchandise or services
- 90 days for issues with recurring transactions
- 60 days for unauthorized transactions
It’s important to act promptly when requesting a chargeback in order to comply with the issuer’s policies. Keep transaction records and correspondence with the merchant to support your claim.
Merchant Consequences of Chargebacks
If a customer chargeback case succeeds, the merchant faces several potential penalties:
- Loss of sale amount – The transaction is reversed and funds returned to the cardholder.
- Chargeback fees – Fees typically range from $20-$100 charged by the bank per disputed transaction.
- Increased processing costs – Excessive chargebacks can raise a merchant’s credit card processing fees.
- Frozen merchant account – Accounts with high dispute rates may be frozen until issues are addressed.
- Termination of merchant account – Ongoing compliance issues can result in account closure.
- Blacklisting – Being placed on a blacklist makes it difficult to obtain a merchant account in the future.
To avoid chargeback penalties, merchants should:
- Clearly describe products/services in ads, listings, and policies
- Fulfill orders accurately as described
- Offer reasonable return policies and fulfill refund requests promptly
- Respond to chargeback notifications in a timely manner
- Provide great customer service and resolve issues amicably
Conclusion
While chargebacks and refunds have similarities, a chargeback is not the same thing as a refund. Chargebacks are a consumer protection initiated through credit card companies, while refunds are processed directly through the merchant. In general, refunds should be attempted first before resorting to a chargeback dispute. But chargebacks provide an important remedy when working with the seller fails and the customer deserves their money back. By understanding the difference between the two processes, consumers can best protect their purchasing interests.