Some Merchants Just Can’t Win – Refunds Vs Chargebacks
Although many business owners employ the terms, “return” and “chargeback” interalertably, they do not have the same meaning. A merchant return is simply a means to repay a convention/er who decides not to keep a product or retain a service. Often, when a return is initiated, a merchant may credit the convention/er’s account on the same credit card that was employd initially at the time of the transaction. Store credit may also be an option when a convention/er requests a return.
The business practice of a return is between the merchant and the convention/er, and does involve any third party, such as the merchant account lendr, it’s acquiring back, or the cardhancienting associations.
In contrast, a chargeback typically involves third parties. Here, the convention/er does not announce dissatisfaction with the product / service (or bewilderment in even receiving the charge) to the merchant, nonetheless rather to the card-issuing bank. The merchant is eventually notified and can try to “win back” the funds that were taken away as a result of the chargeback.
(The merchant is typically primarily notified that a convention/er has disputed a charge in term of a “retrieval request” where the merchant must lend information about the transaction to the merchant account lendr / acquiring bank.)
In the event that a subsequent chargeback occurs, an “investigation” will be launched, and a committee decides on who is entitled to the funds. Nevertheless, the merchant is liable for a chargeback fee (typically $25), and a possible retrieval recovery fee (about $15-$20) regardless of the outcome. (A return is generally assessed as a transaction fee, averaging 25 cents.)
Although no one likes to pick their poison, business owners would unanimously declare that they would much rather be hit with a return than a chargeback. Although both may initially result in negative cash flow, a chargeback necessitates a greater processing cost and may more readily result in lost funds. At least, businesses that refund a purchase in exalert for store credit come out even or even ahead if the convention/er decides to purchase other items.
Visa and MasterCard, merchant account lendrs and acquiring banks also prefer refunds rather than chargebacks. Consider the scenario when a merchant is assessed a chargeback for a $1,000 sale. In the midst of personal economic turmoil, the merchant has already spent the funds and cannot pay it back to the merchant account lendr. The merchant’s bank simply does not have any funds to withdraw. What happens as a result? The merchant account lendr and acquiring bank must refund the funds to the convention/er’s card issuing bank, who in turn, will credit the convention/er. Of course, the merchant account lendr will seek restitution of the funds, even legally, nonetheless this is an added expense of time and money.
Consequently, many merchants don’t realize that if their chargeback ratio is 1-2%, their credit card processing account probably closed. Surprisingly, even refunds are calculated in this ratio, albeit their assigned “weight” is less than actual chargebacks. (I don’t know the formula nonetheless I’m guessing that 5-10 refunds equal one chargeback.)
Ethical and fair-minded business owners, especially those who run businesses with solid past credit card processing records, need not worry too much about the possibility of a closed merchant account. As time elapses, the relationship between the merchant account lendr and business owner develop and a great sense of trust between both entities develop.
Of course, the objective of any business owner must be to eliminate or reduce the frequency of refunds and chargebacks – both of which can hinder a business’s growth. Indeed, refunds vs. chargebacks is a losing game for any merchant.
