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Chargeback vs Refund: Why It Matters, Fraud or Not

As any merchant in the online landscape will tell you, chargebacks are one of the biggest headaches of ecommerce.

But efficiently dealing with refunds is no walk in the park either, with 40% of merchants reporting seeing an increase or significant increase in refund abuse in 2021, according to Qualtrics. 

Today, we take a deep dive into the differences and similarities between chargebacks and refunds, and examine how to reduce both at your business.

Why Merchants Should Care about the Difference Between Chargebacks and Refunds

A refund request is when a customer, be they a fraudster or not, asks for their money back from the merchant, rather than from their card-issuing bank. With a chargeback, the same individual would be placing that request with their bank instead. 

This seemingly minuscule difference has a ripple effect, because it means that with refunds, there are no intermediaries, and the merchant has much more control of the process as well as insight into the claim and how it will be resolved.

For the customer, the result might be the same (though sometimes with a refund you might need to send an item back). But for the merchant? 

For the merchant, a refund is always preferable.

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What’s the Difference Between a Chargeback and a Refund?

The simplest way to think about the two is that a shopper turns to the merchant for a refund, but they turn to their bank for a chargeback.

Because of this, the chargeback process is much more convoluted and costly than a refund request, with many more parties involved in chargebacks, as well.

Chargeback and Refund Comparison Table 

Parties involved• 2: customer, merchant• at least 4: customer, merchant, issuing bank, acquiring bank, payment gateway (plus BNPL, other intermediaries)
Initiated by• merchant (after shopper request or not)• shopper, via bank
Resources required• customer support team
• time to discuss with customer
• customer support team
• time to process the chargeback
• potentially, time to contest the chargeback 
Cost to merchant• lost sale
• in some cases, lost item 
• processing fee on original transaction
• lost sale
• lost item
• several processing & admin fees
• impact on chargeback ratio
• reputational damage
Result for customer• cost of purchase recovered• cost of purchase recovered
• keep item(s) (if received)

Cost of Refunds vs Cost of Chargebacks

The simplest way to think about the differences between the cost of refunds and chargebacks is to remember that chargebacks always include the refund price but also involve processing costs, because more parties are involved. 

To a customer, the two processes might seem almost identical. In fact, the chargeback workflow with their bank might even feel smoother than approaching a merchant as a customer and explaining why you should receive your money back. 

It should be acknowledged that though chargebacks are in place to protect consumer rights, and rightly so, merchants are certainly at a disadvantage. This is because it is very difficult to do chargeback recovery, which entails showing ample proof that the products or goods were in the expected condition, that they were delivered to the shopper, that the merchant has taken all recommended steps to ensure the payment was legitimate, and so on.

So, in the case of refunds, a merchant can more easily challenge the customer’s claim if it is false (and thus a case of friendly fraud). If your Terms and Conditions are bulletproof, you might also choose to explain to the customer that they do not have a legitimate claim for a refund.  

Therefore, the cost of chargebacks is amplified by the fact they are less likely to be blocked by the merchant – be they fraudulent, fraud-related, or legitimate. 

Wondering how much chargeback and other fraud could be costing your business? The calculator below can help you get an estimate.




11 Reasons Why Refunds Are Better than Chargebacks for Merchants

There are several benefits to trying to encourage refunds instead of chargebacks:

  1. Little or no fees: By dealing directly with the customer, even if the business needs to return the money, a merchant avoids paying the banks and payment processors’ admin and processing charges – including the dreaded chargeback penalty.
  2. Keeps you on good terms with banks: Refunds have no impact on the merchant’s chargeback ratio. If the chargeback rate of a business is high, they will be forced by the bank and payment processors to pay higher admin and processing fees on all their transactions. Get it too high, and you can’t even trade with customers who use this type of card issuer. In simple terms, you won’t be able to process any Visa or Mastercard cards, for example.
  3. Can save the sale: There will be instances where the customer who initially approached you for a refund is happy to receive a replacement product or a voucher instead of their money back. This means you can still save the sale or at least encourage them to return to your shop later on.
  4. More checks and balances: As a merchant, you know your items better. When a customer claims they are not as expected, you can provide guidance and troubleshooting before considering a refund. You can even ask to see pictures or videos that demonstrate the issue, for added certainty.
  5. Catch friendly fraud: Opportunistic fraud is easier to identify if you deal directly with the customer, as you can ask for details and proof before refunding. The onus of proof is on them, and they are dealing with you, rather than convincing a third party such as a bank.
  6. Happier customers: By speaking to them directly, the merchant is able to – or at least can try to – ensure the customer is still happy and might be returning. Importantly, it becomes obvious that it is the shop that helped the customer and demonstrated goodwill, rather than the bank helping them.
  7. Identify quality issues: For genuinely faulty items, the merchant can find out which of their stock isn’t working out for customers and choose to change suppliers, their delivery company or other partners. This is because with a refund request, the merchant can ask the customer for additional information about what went wrong.
  8. Quality control: Both the quality of the items or services as well as that of the promises made by advertisements, marketing and other communications can be monitored and potentially ameliorated according to information sourced from refund requests. For example, a merchant could realize their listing on a marketplace is misleading and customers often misinterpret it.
  9. Allows for supplier negotiations: The merchant can turn to their own supplier to resolve any quality or other issues, or can even potentially request a refund.
  10. Quicker resolution: Refunds are much quicker to deal with than chargebacks. This also has a knock-on effect on customer satisfaction and on merchant resources and workload.
  11. No reputational damage: Refunds tend to work to the benefit of shops, while chargebacks are more likely to cause reputational damage.

As a merchant, you have every reason to stress to your customers that they can come to you with any refund requests. Make your support team easy to reach too, monitoring your email closely and even employing a chatbot or live chat option.

chargeback flow: what happens if you challenge it?

What about Refund Fraud?

Refunds tend to also fall into various categories and of course there is such a thing as refund fraud. It includes, for example, return fraud and its subcategories.

However, as we’ve seen when looking at the consequences of chargebacks, refund fraud tends to be less impactful than chargeback fraud – though one would ideally want to eliminate all fraud, of course.

We should clarify that just like chargebacks, the frequency of refunds is also monitored by banks and payment processors, but the frequency at which they become a problem is much higher than chargebacks. 

The intentions behind refund fraud range from innocent to malicious, with the most common examples sometimes referred to as friendly fraud:

  • Innocent or accidental requests: The refund request is made by customers who did not mean to make the purchase, forgot they made it, do not recognize the payment, or had good reason to change their mind afterward.
  • Opportunistic refund fraud: Just like chargebacks, refunds too can be weaponized by opportunistic and dissatisfied customers. A cardholder might lie about whether they found the item satisfactory, for example.
  • Malicious friendly fraud: At first glance, this seems paradoxical. How can it be malicious and friendly at the same time? Well, some buyers have decided in advance that they’re going to request a refund. These bad customers have every intention of attempting to have their cake and eat it – for example by wardrobing, where you know when you are buying an item of clothing that you plan to only wear once and then return for a refund. There are also cases where the customer returns an empty box, or a box filled with useless items of similar weight, hoping nobody realizes on time.

Refund Fraud vs Chargeback Fraud

In terms of catching these two different types of fraud, a merchant is much better equipped to be able to realize they are taking place, compared to the data points that a card-issuing bank might have access to.

This is why your strategy should include these four main tenets:

  • Encourage and enable customers to request refunds rather than chargebacks.
  • Use authorization holds to prevent both.
  • Employ fraud prevention software.
  • Learn from past mistakes and dedicate time to analyze patterns in malicious behavior.

How to Encourage Customers to Request Refunds, not Chargebacks

One of the most cost-effective ways to mitigate against the headache of chargeback fraud is to gently encourage your customers to request refunds instead. So, how do you do this? 

It starts with customer service. As we have seen, it is more intuitive and less time-consuming for a customer to ask for their money back from the shop than the bank, when they can find a way to do so.

In fact, one could even say it is more convenient. Indeed, customers are more likely to instinctively turn to their merchant rather than the bank if they can find a way to contact them. This is even the case online, perhaps because of bricks-and-mortar habits.

  • Make your contact options easy to find on your website. 
  • Consider employing a chatbot to serve customers via social media. 
  • Monitor Twitter and other platforms for complaints against you, and be proactive.
  • Depending on the size of your venture, you can also consider employing a dedicated billing support team available to reach via your website, for even easier contact. 

In a similar vein, consider adapting your messaging to stress how happy you are to help with any issues at all. Finally, the Terms and Conditions section of your website should be up-to-date and easy to understand. If your shipping policies are on the complicated side, consider simplifying them, or providing a FAQ section to make them easier to grasp.

Chargeback and Refund Fraud Prevention

In reality, a merchant will want to prevent chargebacks and refunds alike. And the way to do this depends on the various types of schemes out there.

Overall, you’ll want to take a look at your online store policies, as well as into employing reliable, sophisticated software for order management and for fraud prevention. 

Refund Fraud Prevention Software

In terms of preventing refund fraud, refunds, chargeback fraud and chargebacks, fraud prevention software can go a long way.

These are better implemented proactively rather than after the fact. Common touchpoints include customer sign-up, customer authentication and check-out.

The idea is for the software to be able to gather as much reliable information about your shoppers without affecting their shopping experience. To do this, fraud prevention software employs technology such as device fingerprinting, velocity checks, IP address analysis and more.

In the case of SEON in particular, the unique digital footprint analysis feature does not just catch professional fraudsters by sourcing live data from 50+ online sources; it also helps confirm whether a legitimate customer is indeed who they say they are, so you know when to trust them.

The resulting data points will inform a fraud score that shows exactly how likely the customer is to present a risk of fraud, at present or down the line, which can then be actioned accordingly.

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Refund Policy Tips and Strategies to Reduce Fraud

Moreover, in the battle against fraud, it helps immensely to assess and even adjust your policies as an online store. 

  • Employ authorization holds: One way in which merchants can prevent refunds as well as chargebacks is by using the authorization hold system. This is where a hold is placed on the payment amount yet this amount isn’t released to the merchant until a few days later. If something goes wrong, the authorization hold money can simply be released – which is neither a refund nor a chargeback. For all intents and purposes, it is as if the payment was never made.
  • Keep good records: Both to ensure the quality of product and the delivery and to be able to challenge chargeback and refund requests, keeping meticulous records of inventory, sales and dispatches can go a long way for a merchant. These records can also be input into fraud solutions to better detect fraud in your company’s future.
  • Invest in your messaging: By communicating your shipping, refund, and other policies to your customers in your messaging, you are more likely to be seen as an approachable merchant who they can work with to resolve any issues.
  • Make it easy to navigate your store: There’s no use having customer-friendly policies and detailed messaging available if they are not easy to find. Make sure your store is easy to navigate and the information is accessible. 
  • Optimize your refund policy: Many customers are simply disappointed their shopping experience didn’t return the result they expected. Consider offering up alternative products, exchanges and substitutions instead of money back. You can also gently nudge customers to accept a voucher or gift card instead, perhaps even adding up a discount coupon as a gesture of goodwill. 
  • Review T&Cs: A simple but effective way to minimize unpleasant surprises linked to refunds and chargebacks is to have a legal professional review and fine-tune your Terms and Conditions, and ensure they align with your strategy and risk appetite. 

How SEON Stops Refund and Chargeback Fraud

SEON has extensive experience not only in helping merchants to stop fraud related to chargebacks and refunds, but also to approve with confidence as many trustworthy transactions as possible.

Available as an end-to-end platform or modular APIs, the intelligence SEON provides on shoppers is second to none. 

This doesn’t simply mean weeding out bad actors. It allows you to be confident that the person who is buying from you is who they say they are. In the case of legitimate shoppers, for instance, this can help minimize friendly fraud too – as it’s called when committed by the legitimate cardholder. 

Importantly, this intelligence is gathered without introducing any friction to the customer’s experience. Instead, we rely on the shopper’s email address, bank card information, device configuration, IP address and other given factors, enriching these primary data points from 50+ sources to create complete profiles with no interruption to a normal user experience.

This way, SEON enables fraud prevention that puts up minimal points of friction, does not cause churn and allows you to be as strict or as loose as your risk appetite calls for, minimizing false positives.


Are chargebacks and refunds the same?

No. Though both processes, when completed as normal, result in the customer getting their money back for a purchase that was somehow unsatisfactory, one is issued by the processing bank, and the other by the merchant. For the merchant, there is a significant difference in associated costs, as a refund only returns the customer’s spent money, while a chargeback process involves fees, penalties, and potential reputation issues that impact the merchant’s bottom line.

Is a refund better than a chargeback?

For customers, there isn’t really any difference. For merchants, certainly. Where a refund only involves returning any money spent by the customer, a chargeback also involves the payment of processing and admin fees and can potentially harm the merchant’s reputation with their banking partners.

What is a void transaction?

A void transaction is whenever a merchant cancels a payment before it has time to reach the customer’s bank. This simply means that the merchant doesn’t intend to collect this payment, for any reason at all, including because it’s been found to be fraudulent.

Do banks monitor refunds?

Banks and card issuers also monitor refund ratios just like chargeback ratios. However, because an ecommerce or other retail business has much more control over refunds, it is easier to keep those down, compared to chargebacks.

What is a refund ratio?

For merchants, a refund ratio is the percentage of your total sales that end up being refunded. Interestingly, card issuers such as Visa and Mastercard allow for much higher refund ratios than chargeback ratios – which is one more reason for merchants to try to encourage refunds.

Is a void like a refund?

A void transaction is even better for a merchant than a refund, because the payment was never processed to begin with. As a result, even fewer fees are attached. A merchant may void a transaction if they realize that the purchase was a result of fraud, for example, or if they have overcharged the customer by mistake. Voiding can help avoid both refunds and chargebacks, when done for good reason and with confidence.


  • Statista: Change in fraud levels experienced by online merchants worldwide in 2021, by type, by Qualtrics

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  • Liability Shift – Payment Liability Shifts: Understanding and Preparing for Them

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Nikoleta Dimitriou

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