Although many business owners use the terms, “return” and “chargeback” interchangeably, they do not have the same meaning. A merchant return is simply a means to repay a customer who decides not to keep a product or retain a service. Often, when a return is initiated, a merchant may credit the customer’s account on the same credit card that was used initially at the time of the transaction. Store credit may also be an option when a customer requests a return.
The business practice of a return is between the merchant and the customer, and does involve any third party, such as the merchant account provider, it’s acquiring back, or the cardholding associations.
In contrast, a chargeback typically involves third parties. Here, the customer does not announce his/her dissatisfaction with the product/service or bewilderment in receiving the charge, to the merchant but 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.
A chargeback triggers an “investigation” where a committee will decide on who is entitled to the funds. Nevertheless, the merchant is liable for a chargeback fee (typically $25) 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 exchange for store credit come out even or even ahead if the customer decides to purchase other items.
Visa and MasterCard, merchant account providers 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 provider. The merchant’s bank simply does not have any funds to withdraw. What happens as a result? The merchant account provider and acquiring bank must refund the funds to the customer’s card issuing bank, who in turn, will credit the customer. Of course, the merchant account provider will seek restitution of the funds, even legally, but 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 may be closed. Surprisingly, even refunds are calculated in this ratio, although their assigned “weight” is less than actual chargebacks. (I don’t know the formula but 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 provider 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.