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When to Dispute a Chargeback and When to Issue a Refund


When to Dispute a Chargeback and When to Issue a Refund

There are occasions when a refund is a smarter move than a chargeback dispute. Fighting a chargeback requires time and effort, and merchants often lose chargeback disputes anyway. Here’s our best advice to help you determine when to fight a chargeback and when it’s better to simply refund the customer their money.

When a customer feels like a transaction just hasn’t gone right — maybe the item wasn’t what they expected, it was delivered late, or it arrived damaged — they often seek out a refund. And when it comes to getting that refund, they have two choices: File a chargeback with the bank or ask for a refund from the merchant.

Often, customers decide to file the chargeback without first reaching out to the merchant. The merchant is then blindsided when the chargeback comes in. When this happens, the merchant’s first instinct might be to fight the chargeback to try and preserve their revenue and their good name.

However, this isn’t always the right approach.

When to Dispute a Chargeback

Every merchant knows how expensive chargebacks can be, with lost sales, shipping costs and merchandise, and expensive fees and penalties. Worse, if a merchant’s chargeback rate becomes too high, the merchant risks losing their merchant services account – which, for an e-commerce business, could mean the end of the business.

Chargeback disputes can sometimes make financial and business sense. These situations include:

  • When the merchant is confident the transaction was legitimate and it appears the customer is blatantly trying to take advantage of the chargeback system. Case in point: Research shows 50% of customers who file a fraudulent chargeback will file another one within 90 days.
  • When the merchant has compelling evidence that they believe is strong enough to challenge the chargeback.
  • When the merchant believes that the transaction amount is large enough that it justifies the time, money and effort to fight the chargeback.
  • When the merchant has already issued a refund to the customer of the full amount of the disputed transaction.

When Refunds Are a Better Option

Even though fighting a chargeback may be the right approach in some situations, only 21% of chargebacks are decided in favor of the merchant. It’s therefore no wonder that many merchants don’t even bother with chargeback disputes.

Plus, many consumers are, frankly, lazy. It’s often easier for them to file the chargeback with their credit card company than reach out to the merchant to resolve a dispute. This tendency for consumers to use chargebacks as “self-service refunds” can make it challenging for merchants to dispute each occurrence.

That said, issuing a refund is also often easier and cheaper for the merchant. When a merchant is hit with a chargeback, the merchant ends up de facto issuing a chargeback plus the merchant is hit with an additional chargeback fee. Moreover, the higher the merchant’s chargeback rate, the riskier the merchant is in the eyes of the payment processor – which can put the merchant’s payment processing account in a higher fee category, too.

Additionally, being quick to offer a refund is often perceived by consumers as a hallmark of great customer service. A hassle-free refund process shows the customer that the merchant has their best interests at heart. And the customer gets access to their money much faster with a refund than with a chargeback, which can take as long as 45 days to appear back in their account.

Here’s when merchants might want to refund a customer’s purchase before it escalates into a chargeback dispute.

The Cost to Dispute the Chargeback Exceeds the Transaction Amount

Chargeback fees typically exceed $75. Therefore, for small-ticket items, it might be cheaper and easier for the merchant to simply refund the purchase price — even if the merchant believes they’re in the right.

The Merchant Needs to Keep Chargeback Ratios Low

For merchants in high-risk industries, such as the travel or digital goods industries, issuing a refund rather than fighting the chargeback enables the merchant to keep their chargeback ratios low, which may be a smarter strategy to protect the business’s overall costs.

The Merchant Wants to Improve Customer Relations

Refunding a customer can be an important goodwill gesture that helps keep the merchant’s good online reputation intact.

Deciding whether to dispute a chargeback or issue a refund isn’t always easy. Merchants should evaluate each customer complaint and choose the approach that makes the best sense for the transaction, the customer relationship, and the overall business. Particularly as the business grows, the merchant needs to focus on finding and keeping customers — not fighting chargebacks.

That’s where a great partnership with a trusted expert can help. ClearSale is one of only a few providers offering true chargeback insurance, providing a 100% guarantee against the costs of fraudulent chargebacks. We understand the dispute process and are dedicated to preventing chargebacks from happening at all, keeping up-to-date with issuers’ changing guidelines and making sure your business is covered. Contact a ClearSale analyst today to learn why e-commerce retailers around the world trust us in their fight against fraud and chargebacks.

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