No one likes product returns. Each item a customer sends back means lost sales revenue as well as wasted acquisition, restocking, and processing costs. You may hate them…but if you must choose a chargeback vs. refund, the standard return is the lesser of two evils.
Right or wrong, today’s savvy consumers have learned they can solicit their bank for a refund when dissatisfied with a purchase. Online merchants who try to fight returns by adding obstacles to the process will see an increase in chargebacks.
In this article, we’ll explore the difference between refunds and chargebacks, and outline why merchants should prefer one over the other.
Chargebacks Vs. Refund: What’s the Difference?
Product returns cost US retailers a shocking $351 billion a year! The high cost of returns–especially in the online market, where roughly one-in-three purchases are returned–may lead you to try and prevent as many returns as possible. That can be a problem, though, when those efforts go too far and end up increasing chargebacks.
Chargebacks are a kind of forced payment reversal that occurs at the banking level, rather than the merchant one. Unlike a product return, you don’t have any control over the situation once the chargeback process starts.
To illustrate, let’s assume a customer is dissatisfied with his purchase. He could go to the merchant and ask for a refund, but decides to call the issuing bank instead, claiming he’s been taken advantage of and needs help. The bank files a chargeback on their customer’s behalf, withdrawing the money from the merchant’s bank account and giving it back to the cardholder. At this point, the merchant has two options: either accept the chargeback or try to fight it through litigation-based representment.
Chargebacks cost the global retail market $31 billion in 2017. Sure, that’s a small fraction of what returns cost, but comparing chargeback vs. refund means looking at more than the raw dollar total. You need to ask: “What am I losing per dollar?”
With a chargeback, you’re still losing sales revenue just like you would in a refund. But now, the customer has no incentive to return the merchandise. That means you also lose the cost of the item, as well as the potential future revenue from reselling it. Additionally, you’ll be hit with a chargeback fee to cover processing costs.
Worst of all, each chargeback will count against your chargeback-to-transaction ratio. If chargebacks surpass 1% of your overall monthly transactions, the card scheme may force you into a high-risk merchant program, meaning much higher processing fees. You could even have your merchant account frozen or lose the ability to process cards at all…basically killing your business.
Customers Will Get Their Money Back…One Way or Another
Cardholders who want their money back are going to find a way to get it. If they think a return is going to be too much trouble, or that you won’t let them claim a refund, customers might skip the proper channels and file a chargeback instead. This is a practice called “friendly fraud.”
The problem is more widespread than you’d think. In fact, 8 in 10 eCommerce shoppers admit to committing friendly fraud at least once.
At the return phase, the customer’s goal is to get their money back…it doesn’t really matter how. If buyers think it will be easier to request a return from you, they’ll do that. If they think a chargeback will be easier, they may decide to go that route.
The chargeback vs. refund question should be easy for everyone involved…you just need to act to deter customers from the chargeback path.
Of course, chargebacks can be disputed, but winning isn’t guaranteed even when the customers claim is clearly dishonest. The reason customers provide isn’t always reliable and successfully refuting chargebacks is a hit-and miss process for most merchants.
8 Tips to Manage Your Chargebacks & Returns
You want to minimize returns without risking more chargebacks. That means things like setting stricter time limits or charging for return shipping are not viable options. Instead, opt for we we’ll call “positive return reduction” strategies:
- Ensure Product Quality: Make sure you source quality items from reliable suppliers. Authenticate designer goods to be sure you’re selling what you think you’re selling.
- Provide Clear Descriptions: Don’t make your customer guess about any aspect of the product. Give ample, honest information about size, color, dimensions…anything that could be relevant.
- Clear, Detailed Images: Images are just as important as your descriptors. Provide clear, high-definition images from multiple different angles to let customers see what they’re buying.
- Get Your FAQs Straight: Think of any question your customers might ask, then answer it before they need to ask it in a detailed, organized FAQ section.
- Fast Service: Customers expect a fast response to questions…no matter where they’re asked. The best option is live, round-the-clock support via phone, email, and social media channels.
- Pack Items Carefully: Fulfillment is extremely important, but often overlooked. Package everything in a way that guarantees it arrives in the same condition in which you shipped it.
- Encourage Reviews: Customers trust their peers, and tend to put a lot of stock in reviews. Encourage customers to give their honest feedback of your products…both good and bad.
- Clearly Label “All Sales Final”: If you don’t accept returns on certain goods, make absolutely sure that customers know that before they buy.
You can’t prevent every return, but a return can be an opportunity if used effectively.
One great tactic you can try is incentivizing subsequent purchases; for example, you can offer shoppers a 10-20% bonus if they’re willing to accept store credit instead of a cash return. Lots of people will gladly take the offer, giving you the chance to recover the sale while building positive customer sentiment at the same time. You don’t get that kind of opportunity if you let the sale slip past the return phase into a chargeback.
As mentioned before, there’s really no contest on the chargeback vs. refund question, so don’t risk it by trying to limit customers’ access to returns. Instead, provide the kind of service that prevents returns from happening, then turn every return incident into a new opportunity.
Jarrod Wright is the Marketing Director for Chargebacks911, a company specializing in chargeback risk management and mitigation. Since 2011, Chargebacks911 has helped global merchants recover more than $1 billion in revenue through their diagnostic technologies and tactical representment services, all back by a 100% ROI guarantee. Follow him on twitter.